Throughout the past year, I’ve written a few articles on uranium – both on equities and the commodity itself, laying out the bull case for the yellow metals and its miners. The most recent one of those could be found here. Meanwhile, the uranium market is indeed heating up and the spot price has exploded nearly 50% YtD, while most commodities are struggling in the current macro environment.
As the sector is performing well and getting more attention, financial institutions are not staying still and are trying to offer a wide array of instruments to investors. One such relatively new instrument is the Sprott Junior Uranium Miners ETF (NASDAQ:URNJ), which was launched in the beginning of 2023. In this article I’ll dive into the instrument and compare it to its bigger brother – the Sprott Uranium Miners ETF (NYSEARCA:URNM). Overall, due to the peculiarity of the uranium space with most companies, especially juniors, being explorers/developers with no producing assets and the macro environment of rising cost of capital, URNM seem to be the superior bet.
URNJ was established on 1 February 2023 as Sprott – the ETF provider wanted to become the pioneer in an untapped subsector, since prior to URNJ there were no pure-play ETFs focused on uranium juniors. As of 9 November, the fund has US$163M of assets, compared to US$1.4B for its bigger counterpart – URNM. At the same time, despite the big asset difference, the expense ratios of the ETFs are very comparable – 0.80% for URNJ and 0.83% for URNM.
According to its prospectus, URNJ is designed to track the Nasdaq Sprott Junior Uranium Miners Index. The latter is designed to include companies, which have at least 50% exposure to uranium in terms of their assets. Also, components must have at least US$30M of free-float to become members of the Index and maintain that number above US$25M in order to remain part of it. In order to ensure the small-cap focus, companies with free float capitalization above US$3B are not to be included in the index. No such capitalization requirements exist for URNM with only the focus on uranium being similar.
Top 10 holdings comparison
When looking at the top 10 holdings of the two ETFs, the immediate difference one could spot is the significant presence of producers (in terms of weighting) in URNMs portfolio. The two biggest positions with respective weights of 16.20% and 14.78% are the uranium kingpin Kazatomprom and Cameco (CCJ). Both companies are multi-billion majors, therefore are not appropriate for inclusion in URNJ. Also, the presence of the commodity tracking Sprott Physical Uranium Trust (OTCPK:SRUUF) in URNM should be noted. At the same time, URNJ’s exposure to actual producers or the commodity itself is much lower. While Uranium Energy Corp. (UEC) is the biggest position of the junior ETF, it has just recently restarted production and has many development/exploration projects. The stories around Ur-Energy (URG) and Palladin Energy (OTCQX:PALAF) are similar with the former already restarted production in its flagship Lost Creek project, while the latter is expected to do so in the beginning of 2024.
The macro environment
At the same time, interest rates are rising and capital is becoming expensive. Additionally, inflation has put pressure on development CAPEX, which naturally hurts the economics of projects yet to be constructed. These factors put explorers/developers at a disadvantage, the two majors – Kazatomprom and Cameco are at a much better financial position with considerable production already in place. Overall, from purely a macro perspective, URNM should be better as it has exposure to more stable companies.
Correlation to the uranium price
In an uranium-bull market scenario, the bigger the correlation of the ETF with the commodity, the better.
In the case of URNM and URNJ, both have very high correlation with uranium price (I’m using SRUUF as a proxy), although the junior-focused ETF is slightly behind its bigger counterpart.
After all, the most important metric is actual performance. For comparison purposes I also included SRUUF in order to see how equities in general are doing alongside the commodity itself.
It appears that both ETF are lagging behind uranium price performance, which is quite unusual for a bull market. However, one explanation could be that in an environment of rising cost of capital investors are more risk-averse when it comes to equities and prefer not to shoulder additional risks such as exploration, operational, regulatory and so on, which are typical for miners.
Still, when it comes to URNM vs. URNJ, the former has the upper hand as it has yielded twice the returns of its smaller counterpart. In terms of risk, the situation is similar, as URNM has lower volatility.
Investors who seek exposure to uranium equities should think twice before investing in URNJ. While in an uranium bull market, the ETF should eventually yield positive returns as it did since its inception in 2023, the macro environment puts juniors in an inferior position compared to majors. For that reason URNM seems to be the better choice for uranium equity exposure. The actual performance data and risk metrics also support that conclusion.
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