Insights From ETFs: Global X Uranium ETF (URA)

For this iteration of Exchange-Traded Funds (ETF) Insights, we highlight one ETF for a specific sector. The sector of interest this month is the uranium industry which has been gaining traction over the last few months, given the potential for nuclear energy to be a major clean energy source in the future. We believe the Global X Uranium ETF (URA) gives investors the most comprehensive exposure to the industry. Before diving into the ETF, first it is helpful to get an understanding of the importance of uranium and nuclear energy.

Why is uranium getting more attention today?

Uranium has become more important as an alternative source of clean energy. While nuclear energy does have its negative connotations due to geopolitical tensions around nuclear weapons and nuclear plant accidents in the past, it is one of the cleanest and most efficient forms of energy that exists today. When uranium is turned into nuclear energy through a process called fission, it emits the least amount of CO2 compared to other resources (70 times less than coal). It is also very dense, and therefore only a small amount of uranium is needed to produce a significant amount of energy.

Uranium is found in most rocks across the world, and this is unlike most traditional metals and commodities, which are usually found in concentrated areas in specific regions. This makes uranium a relatively accessible resource. Nuclear energy represents about 10% of the energy consumed today, and this is expected to increase over time.

The ETF

The Global X Uranium ETF (URA) provides investors with direct and indirect exposure to the uranium mining industry and the production of nuclear components. The ETF tracks the Solactive Global Uranium Nuclear Components Total Return Index, about 80% of which are companies that are involved in uranium mining, refining, exposure, and manufacturing of equipment or technologies to produce nuclear components. The table below outlines the key facts of the fund:

Figure 1 - Source: Global X Funds

The fund’s assets under management are large enough size to reassure us of its stability, and its underlying holdings of 47 companies provide diversification to reduce company-specific risk.

The top 10 holdings indicate the companies cover about 63% of the fund, which gives investors a mix of concentration and diversification. In fairness, investors should keep in mind the disproportionately high weighting in Cameco Corp as this adds company-specific risk to the fund. The fund’s expense ratio of 0.69% is also quite reasonable for such a niche type of exposure. (Figure 2 - Source: Global X Funds).

While the URA ETF is meant to provide investors with commodity exposure to uranium, we like that it offers exposure to companies rather than just the price of uranium. This, in turn, gives exposure to different sectors (industrials, mining, energy, materials, financials). In addition to sector diversification, the fund also has a good amount of geographic diversification with a mix of emerging and developed markets, and with Canada having the highest exposure (largely due to Cameco Corp and Sprott Physical). (Figure 3 - Source: Global X Funds).

Key Risks

Nuclear energy is a highly regulated industry and is still in its early stages. This can result in high fluctuations in the share prices of nuclear companies depending on industry news.

The ETF is highly concentrated in its top name Cameco Corp, and so the fund’s performance will be influenced by the company’s stock price movements. However, there is a much more even distribution of names in the fund otherwise.

Key Takeaways

Exposure to uranium and nuclear energy is a tough niche to fit in a portfolio, given the regulatory uncertainty around the space and the lack of maturation of the industry. ETFs are a great way to gain these types of exposures as they reduce the company-specific risk associated with operating in a new space that is competitive. We think URA is interesting for investors because there are few ETFs out there that have this type of exposure, and URA is the largest (in assets under management) and safest to own, with exposure to some of the strongest emerging names in the industry. Of course, as with anything that is still in its early stages, there are uncertainties related to the regulatory framework of the industry, and this should be reflected in oneís position sizing in a portfolio. However, with the trend of countries trying to find new and cleaner sources of energy, we think uranium will benefit long-term.

Moez Mahrez, CFA, Analyst for 5iResearch.ca

Disclosure: Authors, directors, partners and/or officers of 5i Research have a financial or other interest in XIT and ZRE.