URA - NLR: The Case For And Against Nuclear Energy

Summary

• There is a strong argument for investing in nuclear energy to achieve climate goals and to reduce reliance on Russian fossil fuels.
• Nuclear, for the lack of a more reliable clean energy source, is likely to play a key role in the global energy transition.
• Nuclear waste management remains a thorny problem for governments, with huge costs associated.

Overview

The VanEck Uranium + Nuclear Energy ETF (NLR) provides exposure to companies involved in uranium-related projects.

The fund seeks to track the MVIS Global Uranium & Nuclear Energy Index ("Index"). The index invests in companies where at least 50% of total revenues or assets are from the nuclear energy industry.

The index is refreshed on a quarterly basis. As of 12/16/22, the fund was invested in 25 different holdings.

According to etfdb.com, VanEck and Global X (URA) are the only two pure play providers for uranium ETFs.

The NLR fund has an expense ratio of 0.60% per annum, slightly cheaper than the URA fund.

Fund Performance

The NLR fund has returned -1.42% per annum since its inception 2007. The fund's performance has been quite poor compared with the S&P 500 average return of 11.88% per annum since 1957.

The fund has not been able to track its index closely, nor outperform it, with a tracking error of 0.16% per annum.

Investors have not been compensated for the higher risk involved with a sector-specific ETF. A hypothetical investment of $10,000 at inception would be worth less today, without even considering real returns.

The fund's performance can be seen below:

Portfolio

The fund's portfolio exposures are regionally diversified across multiple countries. The highest country exposure is the United States at 48.44%, while the United Kingdom is the lowest at 1.25%.

The fund is heavily weighted towards the United States, representing nearly half of exposures.

The fund's country breakdown can be seen below:

The Case For Nuclear Energy

The Russian invasion of Ukraine has triggered energy security concerns globally. Given the increased geopolitical concerns around energy independence, there has been a talk dubbed "The Nuclear Revival".

Nuclear power was recently discussed at the UN Climate Change Conference in Glasgow and there has been discussions around the inclusion of nuclear power as a clean energy source by the European Commission , which is likely to increase investments in nuclear energy.

Like wind and solar, nuclear power is a solution to avoid a climate catastrophe. Nuclear power is the only energy source that produces less GHG Emissions than wind or solar.

Nuclear power also offers more reliability than wind or solar and is currently the only carbon-free energy source that can deliver electricity 24/7 to essential services such as hospitals or data centers.

Renewables like wind or solar are dependent on weather conditions, which limits their reliability. Although battery technology is improving, it is risky for wind and solar to form the backbone of electricity generation due to their intermittent nature.

Another argument for nuclear power is the small land footprint required for nuclear plants.

According to the Nuclear Energy Institute , a 1000-megawatt nuclear facility in the United States requires about 1 square mile to operate. To produce the same amount of power, it would require 75 times more land area for a solar PV system.

In numbers, it would require 3 million solar panels to produce the same amount of power as a typical commercial reactor.

Nuclear energy will also offer diversification in the energy mix after fossil fuels are phased out.

The Case Against Nuclear

Nuclear power is too expensive and slow to build. According to the World Nuclear Industry Status Report , the cost of generating solar power ranges from $36-44 per MWh (wind power: $29-$56 per MWh) compared with nuclear energy at $112-$189 per MWh.

The construction of a nuclear power plant is a long and complex process, with an average construction time of just under 10 years. The cost and construction time reduces the scalability of nuclear energy, compared with wind or solar.

Nuclear energy also generates huge amounts of toxic waste, with many countries resorting to direct disposal than reprocessing.

The chart below shows the spent fuel policy for countries representing more than 80% of the world's nuclear power capacity. Spent fuel is highly radioactive and is one of the by-products of electricity generation from nuclear energy.

Most countries resort to direct disposal. According to Greenpeace , no government has been able to found a viable solution for the long-term management of nuclear waste.

The general idea behind direct disposal is to bury nuclear waste in deep geologic repositories - out of sight, out of mind. However, there is still operational risk.

Operational shutdowns, accidents or leaks can occur - with potentially catastrophic effects on the environment.

Nuclear waste management remains a thorny problem for governments, with huge costs associated.

According to the US Energy Department , the projected cost for long-term nuclear waste cleanup has increased by more than $100 billion in just one year.

Conclusion

There is a strong argument for investing in nuclear energy to achieve climate goals and to reduce reliance on Russian fossil fuels.

Nuclear, for the lack of a more reliable clean energy source, is likely to play a key role in the global energy transition.

The hope is that innovation in nuclear technology will help solve the nuclear waste dilemma. Until then, I am not fully convinced about the "green" credentials for nuclear energy.

Investing in solar or wind, and the battery technology required to solve the reliability issue, is a more sensible investment in my opinion.

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