Oil & Gas Exploration; Three ETFs Focused on this Risky Enterprise
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According to a client of mine that works in this industry, “punching a hole in the ground and expecting to find oil is akin to speculation.” Oil & Gas exploration relies on technology and tools to find expected sources of energy and only when it is uncovered will the explorer be able to make the second estimate; how large the source of energy is. In essence the holes that pay are to cover the cost of that exploration as well as the costs placed into the holes that did not pay.
The advantage of ETFs using a passive, indexed style in developing portfolios is that the available stocks are issued by companies that have developed an operating history of successfully navigating through this maze of finding energy resources. Here are three ETFs that have accomplished this.
The SPDR S&P Oil and Gas Exploration & Production ETF (NYSEMKT: XOP) is based on tracking the S&P Oil & Gas Exploration & Production Select Industry Index, an equal-weighted index. XOP started in Jun of 2006 and has built a nice performance history. The operating expense ratio is at 0.35% and the portfolio contains 72 stocks. The largest position is placed in Tesoro Corp, with 2.26% of the fund in this stock. XOP makes for a good investment in this part of the energy industry. Operating results of the stocks in this portfolio are based on the successful finding and delivery of oil and gas more so than the actual price of the underlying commodities. Additional details on XOP can be found on https://www.spdrs.com/product/fund.seam?ticker=XOP.
The iShares Dow Jones US Oil & Gas Exploration & Production Index Fund (NYSEMKT: IEO) seeks to match the Dow Jones US Select Oil Exploration & Production Index. IEO started on May of 2006 and put together a solid historical performance record when all measuring periods are considered. There are 62 holdings in this portfolio and Occidental Petroleum Corp, which represents 14.92% of the fund. The operating expense ratio is reported at 0.47%. It appears that IEO is tied to the performance of OXY. This may cause an undue influence on the overall performance when company specific concerns arise. Specific data on IEO can be found on http://us.ishares.com/product_info/fund/overview/IEO.htm
The PowerShares Dynamic Energy Exploration & Production Portfolio (NYSEMKT: PXE) is designed to mimic the Dynamic Energy Exploration & Production Intellidex Index. PXE started in Oct of 2005 and has built an impressive performance history. Down periods were less severe than the underlying index. This may be attributed to the quarterly rebalancing of the portfolio. This extra process has resulted in increased operating ratio expenses, reported at 0.63%, net of waiver. There are 30 stocks in this program and Phillips 66 holds 5.06% of the fund. More details can be found on http://www.invescopowershares.com/products/overview.aspx?ticker=PXE#perfchart.
It is important to distinguish the difference between the stock of an oil company and the stock of an oil & gas exploration company. As part of the energy industry, they each have a separate function and operating profits are derived from different methods and procedures. These three ETFs are just a small part of this sector and for the investor that is seeking exposure to energy and does not want to be subject to the price volatility of the underlying commodity such a fund may work very well in the long run.
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Jeffrey L (Jeff) Stouffer is associated with Kingsview Asset Management, LLC and manages the Alexandria Virginia office. He has earned the privilege of using the CAIA and CFP® marks and holds several FINRA licenses. As a practicing financial advisor serving the needs of individual and owners of businesses, he believes in using a wide range of strategies including alternative investments. For additional information, he can be contact via email at jeff.stouffer@kingsviewassetmanagement.com
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