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Crude oil, natural gas, gasoline — our civilization can’t live without them – so it’s no surprise that energy exchange traded funds (ETFs) are also big business. Today I’m going to give you a brief overview of the ETFs in this sector. As you’ll see, energy is a surprisingly diverse industry. Words: 870
In further edited excerpts from the original article* Ron Rowland (www.moneyandmarkets.com) goes on to say:
1. Big Oil Energy ETFs
Generic “energy” ETFs, almost without exception, are dominated by a handful of big multinational oil companies such as ExxonMobil (XOM), ConocoPhillips (COP), ChevronTexaco (CVX), British Petroleum (BP) and a few others.
a) SPDR S&P Energy (XLE), for example, has just two companies, XOM and CVX, accounting for around a third of its assets.
b) Vanguard Energy (VDE) looks much the same.
Such concentration doesn’t pose a problem with most such ETFs because huge companies like ExxonMobil are very diversified, operating many different business units in a variety of locations around the globe. Their sheer scale gives them some big advantages. On the other hand, it’s usually a good idea not to put too many eggs in one basket.
Some ETF sponsors try to reduce the concentration in Big Oil with different weighting strategies.
c) Rydex S&P 500 Equal Weight Energy (RYE), for instance, holds the same stocks as XLE, but only allocates 2.5 percent — 3 percent to any one stock.
2. Energy Service ETFs
Energy service companies unlike the multinationals, don’t own properties or produce energy for themselves but they do a lot of the work — and get paid well for it. They run drill rigs, perform seismic tests, build pipelines, fly helicopters, and many other sundry tasks and ETFs that specialize in energy service have performed well over the years. What’s the downside? When oil prices retreat, the major producers cut back on their activities. Thus the service companies can be hit hard. However, a lot of their revenue comes from long-term contracts, so they can be worth the risk. Here are two of my favorite such ETFs:
a) iShares Dow Jones U.S. Oil Equipment & Services (IEZ)
b) SPDR S&P Oil & Gas Equipment & Services (XES)
3. Exploration and Production of Energy Resources ETFs
Many of the companies in this group are the small, independent oil companies that take on projects too small or risky for the big guys to consider. Those that succeed are often sold to the major multinationals, or developed as joint ventures. Here are a couple of ETFs that specialize in the E&P subsector:
a) SPDR Oil & Gas Exploration & Production (XOP)
b) iShares Dow Jones U.S. Oil & Gas Exploration & Production (IEO)
4. Commodity-Based Energy ETFs
Not all energy ETFs own energy stocks. Some cut to the chase by trying to track the price of energy commodities. In theory, this makes sense. After all, the companies in ETFs, such as XLE, may go up along with oil prices, but not always. So why not cut out the middleman? Unfortunately, it’s not quite that easy. Some of the best-known commodity ETFs are fiendishly complicated instruments that don’t always move as expected. Moreover, these funds are under attack from regulators and may have to radically change the way they operate. Some use an exchange-traded note, or ETN, structure that is riskier than it looks. I am not down on all commodity-based energy but believe that they are not as magical as some people think and must be used with caution. Below are 2 such funds:
a) U.S. Oil Fund (USO)
b) PowerShares DB Oil (DBO)
5. Alternative Energy ETFs
The world needs new sources of energy and ETFs have been created to meet this need. Some are more generalized within the alternative energy business, while others target specific niches. Here are a few examples:
a) Claymore Solar ETF (TAN)
b) First Trust ISE Global Wind Energy (FAN)
c) Market Vectors Nuclear Energy (NLR)
d) Market Vectors Global Alternative Energy (GEX)
e) Market Vectors Solar Energy (KWT)
f) PowerShares WilderHill Clean Energy (PBW)
g) PowerShares Global Wind Energy (PWND)
The ETFs in this group often tend to be full of risky, small-cap stocks. On the other hand, their upside potential is enormous if oil prices move above $100 again.
Today I’ve barely scratched the surface of the massive energy sector, but as you can see, if you’re ready to take the leap, energy ETFs give you a lot of choices.
*http://www.moneyandmarkets.com/get-energized-with-energy-etfs-37618 (Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. To view archives or subscribe, visit http://www.moneyandmarkets.com.)
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