With diminishing energy resources and rising demand, the future prospect for nuclear energy seems poised for high octane growth. Here’s a look at one way to play this trend...
Where were you on April 26th, 1986?
On that fateful day, one of the greatest industrial and human accidents of all time happened.
A steam explosion was followed by fires and more explosions, resulting in a nuclear reactor meltdown which sent a plume of highly radioactive fallout into the atmosphere. This incident came to be known (by its location) as Chernobyl.
Years later, nuclear energy would inevitably be attached to the stigma of Chernobyl. No doubt, the disaster moved many people to question the viability of nuclear power.
But time and circumstances have changed a lot since 1986.
Old and new economies with their insatiable appetite for oil, coal and other energy sources have turned fierce opponents into supporters of nuclear energy. In fact, right now there are more applications for nuclear plants pending at the Nuclear Regulatory Commission than at any time since 1960.
This little nugget of information should alert any astute investor’s radar screen.
But, is there any substance behind the talk about nuclear energy? And even more importantly what’s the best way for investors to capitalize?
Let’s take a look at some of the pros and cons of nuclear energy before we zoom in on the Nuclear Energy ETF (Ticker: NLR) itself.
Lack of nuclear support is due largely to a handful of highly publicized accidents, notably Three Mile Island in the U.S. and Chernobyl in the Ukraine. No one has ever been (directly) killed in an U.S. commercial reactor accident. Chernobyl, the worst nuclear accident ever, took 56 lives directly and the aftermath continues to this day.
In all fairness, it has to be said that thousands die each year in coal mining accidents and untold millions are affected by conventional power plants.
What are the benefits of nuclear power?
- Third and fourth generation plants are safer and more efficient
- Nuclear plants are not a major source of air pollution and greenhouse gases
- Nuclear plants could (partially) replace more expensive energy sources
What are the risks of investing in nuclear power?
- High start up/building cost of nuclear plants (approx. $4 billion per plant)
- Public opposition
- Nuclear plants as security risk (terrorist targets)
- Failure/overheating of plants
Why can investors benefit from nuclear power?
- Approx. 30 nuclear plants are under construction worldwide
- Dozens of plants are in the planning stage (50 alone in China)
- Potential shortage of fuel (Uranium). Uranium production peaked in the 90’s.
- Uranium output is expected to lag demand at least until 2020
- High profit margins (approx 200%) of running plants
What is the best way to benefit from higher demand in nuclear power?
In the exchange-traded fund (ETF) universe, the Market Vectors Nuclear Power ETF (Ticker: NLR) is the purest nuclear play. The holdings include most of the top companies involved in uranium mining, uranium enrichment, uranium storage, providing equipment for use in the provision of nuclear energy, nuclear plant infrastructure, nuclear fuel transportation and nuclear energy generation. All holdings derive at least 50% of their total revenues from such activities.
Should I make Nuclear Energy part of my asset allocation?
As with any industry sector, in particular a narrow one like nuclear energy, high growth potential comes with a fair shot of risk and volatility.
Since there are few or no other viable alternatives, perhaps Europe is setting the new trend. France now produces more than 75% of its electricity through nuclear plants and has enough electricity to even export it.
Nuclear energy is more than just a long avoided alternative energy source. It is a lucrative business with profit margins increasing as emerging economies like China and India keep growing.
As the supply of other energy sources dwindles, the future prospects of nuclear energy look that much brighter.
Simon Maierhofer is the Co-Founder of ETFguide and manages three Ready-To-Go Portfolios. The Nuclear Power ETF (Ticker: NLR) is on his watch list.
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