Uranium ETFs: Energy with a nuclear twist

What do three countries thousands of kilometers away and located on different continents have in common? Nothing much besides the fact that Kazakhstan, Australia, and Canada produce two-thirds of the world’s uranium from their mines[1]. And are consequently well placed to exploit favorable price movements in this reactive metal. Uranium futures have been steadily trading at around USD$49/lb since the start of August, registering 13.8%[2] of gains year-to-date amid supply-demand imbalances and geopolitical tensions.  

Positive developments in the uranium market

Japan’s Prime Minister Fumio Kishida rejuvenated the nation's interest in nuclear energy in a statement on Wednesday, August 24th, announcing plans for the development and construction of next-generation nuclear power plants.  This marks a major shift in policy for the country which has avoided installing any new reactors following the devastating impact of the March 2011 earthquake and tsunami on Fukushima Daiichi’s nuclear power plant. One potential reason for this U-turn is Japan’s heavy reliance on energy commodity imports such as oil, gas, and coal which, against the backdrop of Russia’s invasion of Ukraine, may have prompted the Asian nation to revisit its nuclear energy plans.  

Japan’s goal of reducing carbon emissions is also likely to have featured in this policy shift as is the case in countries across the globe.  On the other side of the Pacific, the United States House of Senate passed the “Inflation Reduction Act” which allocates USD$369 billion to reduce carbon emissions. This may indeed be the springboard for a nuclear renaissance, with the legislation providing a production tax credit for existing nuclear energy units - in a similar fashion to those received by solar and wind units – with the aim of keeping those plants competitive, extending their life, and preventing their early retirement. 

The uranium bull thesis

Deficits in the uranium market have been steadily worsening since the 1990s, and with the world’s uranium needs increasing at a rapid rate this supply-demand imbalance is set to continue.  Industry experts believe that prices of the reactive metal could climb higher still if a new primary supply, from mining activities, is incentivized.  Meanwhile, secondary sources of uranium, such as those from military stockpiles continue to be recycled. It is challenging to predict the depletion of these secondary sources especially since the uranium market is opaque however there will come a point when the gap will have to be filled by new primary sources of production. Hence, the main motive for investing in uranium is that the price must rise to incentivize new production, and thus fix the deficits of the currently under-supplied market. This has led to the belief that the uranium market is in the early stretch of a new bull market.

Uranium and nuclear energy exposure via ETFs

Demand for uranium has been on the rise as cleaner energy is becoming a targeted focus of governments and organizations around the globe. For investors who believe in the uranium bull thesis, ‘Nuclear Energy’ is the theme to look at. It falls under the ‘Alternative Energy’ trend capturing the investment opportunity in the ‘Technology Innovation’, ‘Rising Urbanization’, and ‘Environmental Changes’ megatrends. Exchange-traded funds adopting this theme invest in the stock of companies involved in uranium mining, nuclear components production, and utility companies that produce electricity from nuclear sources. 

Trackinsight's Thematic ETF Screener identifies 6 Nuclear Energy ETFs available to global investors. Interestingly enough, 5 of the 6 products are aligned to the Sustainable Development Goal (SDG) number 7, also known as ‘Affordable and Clean Energy’. They follow an ‘ESG Thematic’ strategy focusing on one sustainability theme. Together, they hold USD$2.7 billion[3] of assets under management while attracting USD$916 million year-to-date.

Below is a breakdown of the two largest Nuclear Energy ETFs available to investors, as measured by assets under management.

Global X Uranium ETF (URA)

The Global X Uranium ETF (URA) was released to the market on November 4th, 2010. It is the world’s largest nuclear energy ETF managing USD$1.6 billion of assets. This passively managed fund aims to reflect the performance of the Solactive Global Uranium & Nuclear Components Total Return Index. It gives investors exposure to companies primarily involved in uranium mining and the production of nuclear components, including those in extraction, refining, exploration, or manufacturing of equipment for the uranium and nuclear industries. The fund is globally diversified, but to a lesser extent, holding almost half (46.7%[4]) of its assets in Canada. The remaining assets are spread across several countries such as Australia (14.2%), South Korea (10.4%), Kazakhstan (6.8%), and others. Canada’s Cameco Corp makes up almost a quarter of this fund’s assets with 23.82%, followed by the Sprott Physical Uranium Trust with 8.24%. URA costs 0.69% to own per annum and exhibits -0.55% tracking error. 

Sprott Uranium Miners ETF (URNM)

The Sprott Uranium Miners ETF (URNM) was incepted on December 3rd, 2019 and holds USD$936 million of assets under management. It is a passively managed ETF, like URA, but tracks a different index. It invests at least 80% of its total assets in securities of the North Shore Global Uranium Mining Index. Meanwhile, the index tracks companies devoting at least half of their assets to the uranium mining industry. These businesses may include mining, exploration, development, and production of uranium, or holding physical uranium, owning uranium royalties, or engaging in other, non-mining activities that support the uranium mining industry. The fund provides a pure play on uranium but is less geographically diversified than URA. It holds 55.0%[5]of its assets in Canada, 17.5% in Kazakhstan, and 13.5% in Australia with the rest spread across only three other countries. Concentration risk is often a factor in small sector and thematic ETFs, and that's a consideration for URNM. Only three holdings constitute more than 45% of the fund’s assets. Canada’s Cameco Corp makes up 17.39%, followed by Kazakhstan’s Kazatomprom with 16.96% and the Sprott Physical Uranium Trust with 10.57%. URNM costs 0.85% per year to own, exhibits -1.17% tracking error and adopts a distributing dividend policy.