Make Money in Undervalued Coal Stocks the Easy Way

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Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you expect coal companies to prosper over time due to unrelenting demand for energy, the high price of oil, and the fact that alternative energies are not likely to dominate the market any time soon, then PowerShares Global Coal (NAS: PKOL) could save you a lot of trouble. Instead of trying to figure out which companies will perform best, you can use this ETF to invest in lots of them simultaneously.

The basics
ETFs often sport lower expense ratios than their mutual fund cousins. The coal ETF's expense ratio -- its annual fee -- is 0.75%. The fund is very small, too, so if you're thinking of buying, beware of occasionally large spreads between its bid and ask prices. Consider using a limit order if you want to buy in.

This ETF trounced the S&P 500 in 2009 and 2010, but lagged behind it significantly in 2011. It's also very young, with just a few years on the books. As with most investments, of course, we can't expect outstanding performances in every quarter or year. Investors with conviction need to wait for their holdings to deliver.


What's in it?
Few coal companies have had strong performances lately, due partly to the low price of natural gas. Over the past year, Alpha Natural Resources (NYS: ANR) is down 75%, Arch Coal (NYS: ACI) is down 70%, Peabody Energy (NYS: BTU) has fallen 58%, and Alliance Resource Partners L.P. (NAS: ARLP) is off 28%.

Demand for coal is expected to be low in the near future, and some foreign importers of coal are looking into serving their energy needs via fracking for gas. Still, fracking is a controversial process, and should it fall out of favor, that would be a boon for coal.

While coal's future looks bleak to some, others remain hopeful. Alpha Natural Resources bulls, for example, cite persistent demand for coal from developing economies, and its strength in metallurgical coal production that's used in steel. Fans of Arch Coal and Alliance Resource Partners drool over their dividends -- recently yielding 4.3% and 7.1%, respectively. Both have reasonable payout ratios, suggesting that their dividends are sustainable for the time being -- and Alliance Resource has been upping its payout by an annual average of more than 13% lately. Meanwhile, my colleague Christopher Barker thinks that Peabody Energy is one of the best energy investments around. He cites robust global demand for coal, as well as a growing demand for Peabody's thermal and metallurgical coal.

The big picture
Demand for coal isn't going away anytime soon. A well-chosen ETF can grant you instant diversification across any industry or group of companies, and make investing in -- and profiting from -- it that much easier.

Learn about the 5 ETFs That Could Soar in 2012. And if you're looking for some great investments beyond ETFs, consider these 12 Dividend Stocks for 2012.

At the time this article was published LongtimeFool contributorSelena Maranjian,whom you canfollow on Twitter, holds no position in any company mentioned.Click hereto see her holdings and a short bio.Motley Fool newsletter serviceshave recommended buying shares of Alliance Resource Partners. The Motley Fool has adisclosure policy.We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.

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