Nuclear Power Renaissance ETF Strategy

With electricity demand growing at the fastest rate in over a decade, nuclear power is gradually moving out of its niche and new investment opportunities are emerging...

On October 24th, Bank of America Merrill Lynch analysts Jared Woodard, John Glascock, and Phoebe Block released a report stating that since 2019, the performance of nuclear-related companies has consistently outperformed their peers. The nuclear energy ETF tracked by the institution has risen by 27% annually, while the MSCI World Index, which tracks global stocks with the same industry weight, has only increased by 14%.

Bank of America Merrill Lynch recommends investors to focus on three ETFs, believing that funds holding physical uranium such as the Sprott Uranium Miners ETF (URNM), the Global X Uranium ETF (URA) which tracks top uranium mining and enrichment companies globally, and the VanEck Uranium + Nuclear Energy ETF (NLR) are likely to continue to perform well in the long term.

Nuclear Energy "Comprehensively Crushing It", Comparable to AI

In the past year, electricity and uranium ETFs have received $1.6 billion in inflows, while "clean energy" funds have seen outflows of $2.4 billion. The assets under management of nuclear energy ETFs have surpassed other clean energy funds, with total assets of over $6 billion, while assets of other popular clean energy funds like ICLN have dropped from a peak of $22 billion to $5.5 billion in just three years.

In the second quarter of 2024, electricity bookings are expected to increase by 35% year-on-year. Andrew Obin stated, "As the lifespan of nuclear power plants extends, the operating time of nuclear power plants will be extended from 30-40 years to 60-100 years, leading to continuous positive growth in demand".

Behind the strong demand, there is also the advantage of nuclear energy's "high cost-effectiveness". Over the past 50 years, nuclear energy has avoided 60 gigatons of carbon dioxide emissions. The average "normal operating time" of nuclear power plants is 93%, far higher than wind energy at 35% and solar energy at 25%.

Best return on investment: For every 1 joule invested in nuclear energy, the return is 75 joules, compared to around 30 joules for fossil fuels and only 9 joules for concentrated solar energy.

Cost-effectiveness of nuclear energy: Calculated on a "full package" basis, the average cost of building and producing nuclear power is $96 per megawatt-hour, compared to $146 for wind energy and $109 for solar energy.

Efficient land use: A 1000-megawatt nuclear power plant requires 1.3 square miles of land; a solar power plant of equivalent scale requires 45-75 square miles; and wind energy of comparable scale requires 260-360 square miles In addition, nuclear energy is also "undoubtedly superior" in terms of investment returns. The report analyzed the returns of the global stock industry over the past five years and concluded: "The premium of nuclear energy is obvious".

For example, the energy weight of the most diversified ETF URA is 63%, industry is 19%, materials is 4.5%, and physical uranium is 13%. However, using the same combination for the global stock sector (including physical uranium), URA's annual average return is 15% higher than the global stock industry, with even higher risk-adjusted returns.

On average, since 2019, the return of nuclear energy ETFs has been 151% higher than the global stock industry (annual average of 14%), with stronger risk-adjusted returns.

The analysis points out that in traditional economic sectors, the exposure of nuclear energy is like AI in the semiconductor or technology sectors, and investors are paying for their potential.

Benefiting from the rise in uranium prices, URNM has great potential

As the main fuel for nuclear energy, the rise in uranium prices directly affects the profits of mining companies. Bank of America Merrill Lynch pointed out in the report that uranium will face supply-demand imbalances in the future, leading to an increase in uranium prices.

Demand side: On one hand, the extension of the lifespan of nuclear power plants, the development of new technologies such as Small Modular Reactors (SMRs), have brought incremental demand for uranium.

On the other hand, some major technology companies have recently announced nuclear project agreements. For example, Google recently signed a power purchase agreement with Kairos Power for a small modular reactor (SMR) that will generate 500MW of energy by 2035. In July of this year, the U.S. Department of Energy announced $9 billion in funding for SMR development. A series of events have increased interest in new nuclear technologies, thereby driving demand for uranium.

Supply side: Analysis indicates that with increasing demand, uranium supply is expected to be restricted until 2027. Coupled with slowing mine production and geopolitical risks, uranium supply will be further constrained.

Lawson Winder of the Global Research Department at Bank of America believes that due to uranium supply shortages by 2027, spot uranium prices may rise to $135 per pound by 2026, a 60% increase from the current price.

The fund holding spot uranium, Sprott Uranium Miners ETF (URNM), therefore has great potential. The fund has risen by over 230% since 2019, outperforming the semiconductor industry by over 50%.

URA Provides Diversified Sources of Income

Since 2019, the Global X Uranium ETF (URA), which tracks top uranium mining and uranium enrichment companies globally, has risen by over 250%. This fund provides access to the entire nuclear energy value chain, including physical uranium.

Companies held by URA, such as Mitsubishi Heavy Industries, offer investors diversified sources of income by region and industry. Year-to-date, the company's stock price has risen by over 160%. Despite Mitsubishi Heavy Industries accounting for only 2% of URA, it has contributed over 3% to the fund's annual total return.

The fund also has broad investments globally, with Canada accounting for 50%, the United States 15%, Australia 12%, South Korea 9%, and other regions in Asia and the Middle East.

Various Positive Factors Support NLR Performance

Since 2019, the VanEck Uranium + Nuclear Energy ETF (NLR) has outperformed global utilities and energy stocks by nearly 60%. Recent news indicating tech companies' interest in nuclear energy has further boosted the fund's price. Analysts suggest that the price increase reflects people's desire for reliable power supply.

NLR has a 40% stake in the utilities sector, with holdings like Constellation Energy Corp (CEG) accounting for 9% of the fund. Recently, CEG announced an agreement with Microsoft to power one of Microsoft's data centers at a contract price of around $109 per megawatt-hour, higher than pricing in other electricity markets.

Furthermore, the U.S. Department of Energy recently predicted that by 2050, the U.S. will need an additional 200GW of nuclear power, higher than today's 97GW. The existing 41 U.S. nuclear power plants can accommodate one to two new reactors, potentially bringing in 60-95GW of new capacity. This news has also driven the fund's rise