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What's Behind the Surge in Uranium ETF?

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The only pure play uranium ETF - The Global X Uranium ETF (URA - Free Report) started 2017 on an encouraging note. In fact, URA surged 20.1% in the last one month (as of January 10, 2017) outshining the broader materials ETF - Materials Select Sector SPDR Fund (XLB - Free Report) and Vanguard Materials ETF (VAW - Free Report) , which fell 1% and 1.2%, respectively (read: Uranium ETF URA Hits New 52-Week High).

The uranium industry suffered a huge setback following the Fukushima disaster in March 2011. The nuclear industry nearly collapsed and badly impacted the uranium sector. Demand for uranium decreased soon after the catastrophe as many nuclear plants were shut down and more projects were delayed. With supply outstripping demand, the price of uranium fell drastically.

However, demand is expected to pick up with Japan paving the way for its nuclear power plants to restart operations. The country plans to bring seven reactors back on line by March 2017 and additional 12 reactors back on line by the spring of 2018. Atomic power contributed to almost 33% of Japan’s electricity pre-Fukushima. Japanese Prime Minister Shinzo Abe is working to diminish the country’s reliance on expensive fossil fuel imports and is a proponent of nuclear power (read: 5 ETF Investment Ideas for 2017).

Apart from Japan, demand for nuclear power is also expected to surge domestically. Many market experts expect president-elect Donald Trump to take a friendlier stance toward nuclear power. Demand is also surging in Asia particularly in India and China – which has high consumption of electricity due to huge population. The uranium market stands to benefit from rising electricity needs.

With crude oil prices on the rebound, demand for nuclear power is expected to increase. Thus, one of the primary reasons for uranium staging a comeback is the surging oil prices. As per data from U.S. Energy Information Administration (EIA), natural gas inventory drawdown was beyond analyst expectations for the week ended December 23. The production cut by Organization of the Petroleum Exporting Countries (OPEC) and non-OPEC producers is supporting oil prices. A rise in oil prices can have a positive impact on uranium demand (read: 5 U.S. Equity ETFs Beginning 2017 with a Bang).

Meanwhile, the uranium mining sector has been an area to watch lately as Kazakhstan state company – the world’s top uranium producer – plans to slash production by 10% this year. However, the deployment of a large number of reactors globally would reverse the supply glut in the long term, resulting in higher uranium prices.

Investors could definitely take advantage of this upcoming surge by focusing on the only pure play - The Global X Uranium ETF – which tracks the Solactive Global Uranium Total Return Index (see all Materials ETFs here).

The fund manages an asset base of $126 million while it charges 70 bps in annual fees. Volume is good as it exchanges about 158,000 shares a day. It seems that URA might continue with its strength given a positive weighted alpha of 39.70. Since a positive weighted alpha hints at more gains, there is definitely still some promise for investors who want to ride this surging ETF a little further.

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