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The return of risk appetite boosts nuclear, natural gas and coal ETFs

WITH the UN climate change summit and the G20 meeting later this week, countries&rsquo; energy policy is expected to be a hot topic this autumn in the build up to the UN climate change conference being held in Copenhagen in December. <br /><br />Pressure is building on advanced economies to reduce their carbon emissions and develop cleaner technologies, while encouraging industrialising countries such as China and India to do so as well. <br /><br />Fuels, like other commodities, suffered badly at the start of the financial crisis as manufacturing ground to a halt. Green campaigners will have rejoiced at the statistics published earlier this week by the International Energy Agency (IEA) which revealed that the global output of carbon dioxide are predicted to fall by about 2.6 per cent this year following a tumble in industrial activity.<br /><br />But a revival in investors&rsquo; risk appetite over the past six months and a return to growth for manufacturing production, particularly in East Asia, means that there has been a resurgence in demand for basic resources. <br /><br /><strong>RISK APPETITE</strong><br />Indeed, ETF Securities&rsquo; Russell Global Coal Mining Fund is up 111 per cent so far this year, thanks to this return of risk appetite to the markets as the global economic recovery has become more entrenched. Their global nuclear energy ETF has risen 32.4 per cent year-to-date, while the ETF based on the Dow Jones STOXX 600 Oil &amp; Gas fund has jumped 30.4 per cent.<br /><br />But while the revival in emerging market manufacturing and indeed the growing demand for electricity and cars in developing countries is likely to keep up the demand for fuels in the short-term, investors should start considering what impact tightening legislation on energy policy will have on the price of coal, natural gas and other fuels in the medium term.<br /><br />Although coal has risen strongly this year, it is expected to come under fire from policymakers as a relatively polluting fuel, so we could well see a pullback in the coal ETF as investors look to take profits and lock in their astonishing gains.<br /><br />Instead, those looking to buy energy ETFs now might do better to look at natural gas ETFs, in light of tightening policy on carbon emissions. Any introduction of a carbon tax or cap-and-trade in the US will make natural gas more competitive (and boost demand) because it is a cleaner fuel than either coal or oil.<br /><br />And trading fundamentals suggest that a bounce in natural gas could be overdue. Oil and gas used to be highly correlated during the boom years, but this has changed.<br /><br />At its peak last summer, crude oil was trading at more than $140 a barrel, while natural gas was worth only $9 for 1m British thermal units (Btu). And while oil is now back at above $70 per barrel, natural gas is tr ading in a recent range of between $2 and $2.70 per million Btu, well below what the former correlation would have indicated.<br /><br />US investors certainly think that natural gas ETFs are looking attractive at the moment. Last week, operators of the US Natural Gas ETF were unable to create new units fast enough to meet investor demand and so they were forced to close the exchange-traded fund temporarily after finding that it was trading at a 30 per cent premium to the market.<br /><br />ETF traders should now be looking to jump into natural gas ETFs in anticipation of a significant bounce in the underlying asset over the next six months.