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Commodity ETFs

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Although coal investments had a rough 2011, this year could be very different for the much-maligned industry.  Solar power is nearly on its deathbed and wide adoption of wind power still seems like it is several years away at least (see First Solar Guidance Routs Solar ETFs). Given this lack of viable clean alternatives, as well as the rising price of oil, there is definitely reason to believe that coal could make a comeback this year.

Beyond a rebound from beaten down prices, investors could also be well served by looking at the space from a diversification standpoint as well. That is because many coal-focused firms are on the small end of the scale and are often overshadowed by their giant cap brethren in many energy-centric ETFs. In fact, in (XLE - ETF report) the biggest energy ETF by assets under management, two of the biggest coal firms, Consol and Peabody, make up less than 2% of total assets while Exxon (XOM - Analyst Report) and Chevron (CVX - Analyst Report) combine to make up nearly one-third of the entire portfolio. Thanks to this reality, as well as the strong fundamentals of the coal sector in the medium term, an investment in this energy industry could be worth looking into via either of the two coal ETFs highlighted below:

Market Vectors Coal ETF (KOL - ETF report)

This popular ETF tracks the Stowe Coal Index which is a rules-based, modified-capitalization-weighted, float-adjusted index intended to give investors a means of tracking the overall performance of a global universe of listed companies engaged in the coal industry. Currently, the fund holds 34 securities in total and charges investors 59 basis points a year in fees (also read Three Low Beta Sector ETFs).

KOL is heavily exposed to American coal firms which make up about 40% of the total exposure although the fund does have significant holdings in the Asia-Pacific region as well. In fact, three countries from this area of the world—China, Indonesia, and Australia—combine to make up another 50% of the fund. In terms of individual securities, Hong Kong-listed China Shenhua Energy takes the top spot and is then followed by two American coal companies to round out the top three; Consol Energy (CNX - Analyst Report) and Peabody Energy (BTU - Analyst Report). For performance, KOL is down 29.5% over the past 52 weeks but it has surged in the past quarter, gaining 18.8% in that period.

PowerShares Global Coal Portfolio

PKOL is the upstart in the coal ETF space as the fund has not captured the same level of assets as its Market Vectors counterpart. However, the fund does track a similar index to KOL, although it uses a modified market cap weighting system to track the NASDAQ OMX Global Coal Index. With this focus, the fund holds 30 securities in total and charges investors a slightly higher expense ratio of 75 basis points (read Top Three High Yield Sector ETFs).

PKOL also has a heavy focus on the U.S. and the three key Asian markets, but it is more spread out than its counterpart, allocating just 27% to the U.S. Additionally, the fund also gives a 10.3% weighting to Canada, helping to spread the assets further across North America. Individual holdings are also similar—both share the same top three holdings—but PKOL actually is less concentrated in its top then than KOL in its top ten. For performance, PKOL has suffered in 2011, plunging by 33.2% on the year although it did manage to turn things around in the final quarter, rising by 16.6% in the period.

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