Uranium ETFs: An Emerging Market and Opportunity
Despite the challenges of 2020, ETF growth has hit new strides. Options are emerging for investors in the uranium space.
Exchange-traded funds (ETFs) are one of the fastest-growing investment vehicles. Offering diversity within a specific sector, ETFs have become extremely popular since launching in 1993.
When the Dow Jones Industrial Average (INDEXDJX:.DJI) broke its all-time high of 30,000 in late November, a contributing factor was growth of the SPDR Dow Jones Industrial Average ETF Trust (ARCA:DIA).
The ETF, which contains 30 blue chip stocks and US$24.7 billion in assets under management, also marked a milestone, breaching US$300 per share the same day. While DIA is only one large-scale ETF, its positive performance is indicative of the potential the broader ETF space holds.
Despite 2020’s challenges, ETF growth has hit new strides. In the first six months of the year, Canadian ETFs registered US$22.4 billion in inflows, more than double compared to the same period in 2019.
Moving forward, the North American ETF sector will have an estimated US$5.9 trillion assets under management by 2021, according to one market research report.
“The ETF market has become increasingly crowded, particularly in North America,” reads the document from Research and Markets. “The North American ETF market dominates in terms of sheer size, but it also continues to have significant momentum.”
Uranium ETFs: An emerging market
While gold ETFs are the most known and popular in the resource space, there are plenty of unique and niche ETFs to choose from. Uranium ETFs are lesser known, but still mainstream.
Unlike gold, which offers dozens of ETF options, there are only four pure-play uranium ETFs in the space. The first, the VanEck Vectors Uranium + Nuclear Energy ETF (ARCA:NLR), launched in 2007 and tracks a market cap-weighted index of companies in the uranium industry.
The latest, the Horizons Global Uranium Index ETF (TSX:HURA), was created in 2019, becoming the first pure-play uranium ETF in Canada. It provides exposure to the C$15 billion and growing uranium industry.
“We’ve seen steady demand coming from our Canadian investors,” said Nicolas Piquard, vice president, portfolio manager and options strategist at Horizons ETFs.
“One of the surprising things for us was that we were getting a lot of interest, not only from (Canadian) investors, which, you know, we were hoping for, but also from international investors as well.”
Containing 10 uranium companies, from sector leader Cameco (TSX:CCO,NYSE:CCJ) to emerging miners like NexGen Energy (TSX:NXE), HURA provides a wide range of exposure to the uranium market.
In addition to having size and liquidity criteria, HURA follows an index that represents big- and small-scale uranium miners. The ETF caps the weight of each company at 20 percent. This is calculated during reweighing periods and accurately adjusted.
“(The strategy) basically allows for junior miners to also be represented within the index and not just have the big ones,” Piquard said.
In addition to majors and juniors, HURA contains companies that hold uranium
“The other thing that’s interesting about our ETF is that 20 to 25 percent of the index is going to be invested in companies that hold physical uranium,” said Piquard. “So not only are you getting exposure to the miners and in the junior miners, but you’re also getting exposure to the underlying physical uranium commodity through those uranium holding companies.”
As a pure-play ETF, HURA’s growth is closely tied to the value of uranium. That’s something Piquard expects to seen trend higher sooner than later. “We haven’t had the bull market that we kind of anticipated when we first launched,” he said. “But I think that’s coming.”
Uranium ETFs: The impact of COVID-19
After three years of stagnation, the uranium spot price began to strengthen in 2020 in the face of COVID-19. Climbing 19.7 percent year-to-date and 33 percent at its peak, uranium even maintained its momentum in March, when commodities like gold and silver slumped.
Because COVID-19 created extreme market disruption, the uranium industry did encounter some volatility. However, as Piquard noted, the supply and demand picture improved for the industry and positively impacted fundamentals for the ETF.
The portfolio manager credits two factors for the resiliency in uranium prices: Cameco’s temporary shuttering of Cigar Lake and Kazatomprom’s production reduction.
“That really helped uranium prices recover, and when they recovered, people started to take more notice,” explained Piquard. “Uranium at one point this year was one of the best-performing commodities with gold; one of the few commodities that was up on the year.”
There was concern that falling prices in the energy space, especially for oil, would carry over to the rest of the sector and weigh on the emerging market ETF.
“When (we saw) all the dislocation in the oil market, that might have led to more dislocation in other energy markets. But we didn’t see much of that,” he said, noting that nuclear production is relatively steady compared to oil consumption.
“So the demand side of the equation, which was really volatile in other energy markets, wasn’t as volatile for uranium.” Regardless, HURA experienced a dip in mid-March followed by a prolonged uptick.
“In that respect, we saw a big selloff in our uranium ETF in March, when everything was selling off and, you know, it came right back,” said Piquard. “And it’s still up on the year (16 percent). So overall I’d say we’re pretty pleased.”
Uranium ETFs: Indicators point to growth
In August, the uranium price slipped below US$30 for the first time since March. It’s held in the US$29 range since then, a threshold prices haven’t steadied at since November 2018.
Whether the uranium price will hold into 2021 is uncertain, especially in a market that is notoriously difficulty to gauge. Piquard believes the opaqueness related to how much inventory is actually out there is the most impactful factor. “You know, if you speak with the bulls, they say there’s not much; the bears, they say there’s a lot,” he quipped. “But the one thing we do know is that there’s greatly reduced production, and so less primary supply coming on.”
A decline in output paired with Cameco purchasing off the spot market bodes well for a move higher in coming months. “(Cameco has) made it clear that they’re bullish on uranium prices going forward. Of course, it’s to their advantage to think that,” said Piquard.
“But when you have one of the largest uranium miners in the world telling you that not only do they think the price will go higher, but that they will be buying, I think that’s optimistic for the future.”
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Securities Disclosure: I, Georgia Williams, hold no direct investment interest in any company mentioned in this article.
Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.