Let me preface this piece by saying I stole this specific instrument from Jeffrey Saut, who mentioned it in his weekly missive.
Long-time readers will know I've mentioned this market has become all about asset allocation and sectors - I noticed this late in 2007 when we were hiding out in commodities while many other sectors were imploding, but other than a few periods when "everything" is going down (or up), it appears a lot of individual stock selection is going out the window and "sectors" are more important.
Some themes are broad like "China" or "commodities" (which in many ways are now the same theme), where others are narrower such as "casual dining restaurants". I don't know if its the dominance of program trading or the growing popularity of ETFs, but this seems to be a secular change in the stock market. When a sector is hot - even one with such diverse entrants as casual dining restaurants - and you can simply throw a dart and be a winner, no matter which individual stock you choose.
Obviously we've been talking about the (now) very crowded reflation trade... in countless posts in first half 2008, I used to say "throw a dart, it all works" in the commodities space. Natural gas = oil = copper = wheat = potash = iron = coffee = coal. It's all the same to this market and the HAL9000s of the program trading parade. I see the same thing now ex natural gas (the commodity). While I think this is an overcrowded theme right now, prone for a correction - I do believe it is the ultimate 'correct' direction... but the crowd might be ahead of itself.
So one way to have exposure to the very broad "energy" "reflation" "commodity" "China / Brazil" trade is an ETF - most are focused on niches, but Saut mentioned a closed end fund Blackrock Energy and Resources (NYSE:BGR) and when I looked at its holdings, it has exposure up and down the daisy chain.
Now this is a closed end fund, not an ETF, so these trade at a discount / premium to NAV - which means part of your risk / return is dependent on the variance versus NAV. The fund is currently trading at a 3.6% discount to NAV, but that is actually at the top end of its historical range (0 to -15% discount). But if you want to keep it simple and want to have a broader exposure to the energy spectrum, then you would with just a subsector of energy such as coal [May 20, 2009: Market Vectors Coal (NYSEARCA:KOL) Red Hot]. This looks like a comprehensive way to do it. And if you want to marry the "carbon" trade with the "not so carbon" trade, you can marry an ETF like this with a solar ETF, such as TAN [Apr 16, 2008: A One Stop Shop for Solar - Get TAN]
Here is a link to the product page - per the description
The BlackRock Energy and Resources Trust, BGR, is a perpetual closed-end equity fund. BGR commenced operations in December 2004 with the investment objective of providing total return through a combination of current income and capital appreciation. Under normal market conditions, the Trust will invest at least 80% of its total assets in the equity securities of energy and natural resources companies and equity derivatives with exposure to the energy and natural resources industry. Companies in the energy and natural resources industry include those companies involved in the exploration, production or distribution of energy or natural resources, such as gas, oil, metals and minerals as well as related transportation companies and equipment manufacturers.
Daily volume is 200,000, which is not bad; it's liquid enough for most people to get in and out of easily. The fund also has about half a billion in assets so it's not some new entrant into the ETF landscape.
Performance is as follows
- 2006: +12.1%
- 2007: +34.2%
- 2008: -48.3%
- 2009 YTD: +45.1%
Volatile indeed, but as the horde rushes into thesis and the student body jumps in and out, this is the cost. If you are in inflationiosta than we're just getting started down the path, this would be an interesting name to build a position into if there is a decent pullback.
There are about 65 positions, with 30% in the top 10 holdings - but as I noted above the key with this name is the incredibly broad exposure to the entire energy food chain. There are a plethora of names we've owned individually in the past...
Here are the top 5 holdings (with weightings) as of 3/31/09
- Transocean (NYSE:RIG) 4.4%
- Consol Energy (NYSE:CNX) 4.0%
- Petrohawk Energy (NYSE:HK) 4.0%
- Whiting Petroleum (NYSE:WLL) 3.2%
- National Oilwell Varco (NYSE:NOV) 3.0%
We've owned 4 of the top 5 names oursleves in the past 2 years, and right off the top you have a marine driller, a coal company, a natural gas name and the largest rig builder in the world.
Other major holdings by sector
- Coal: Massey Energy (NYSE:MEE), Peabody Energy (BTU) and Arch Coal (ACI)
- Services: Schlumberger (NYSE:SLB)
- Pipelines: Enterprise Products Partners (NYSE:EPD)
- Fertilizer: Potash (NYSE:POT)
- Gas/Oil Exploration in Natural Gas/Crude: Apache (NYSE:APA), Exco Resources (NYSE:XCO), Penn Virginia (PVA), Petrobras (NYSE:PBR), Southwestern Energy (NYSE:SWN) and Range Resources (NYSE:RRC)
You even get a little metals mining exposure (3%) in there with
There are also a host of options, both puts and calls, written which is interesting. You can see the entire list of holdings here per SEC filing
is very dependent on the US with 75%, and Canada second as 12%. You also get great diversification in terms of market cap - large caps over $10B make up over a third of the holdings but companies of the $300M to $2B market cap are 20%. But like I said above - when 'reflation' is on, companies of all sizes will move together so it's a bit of a moot point. And while you are buying this sort of name because hedge funds across the land are piling into the same old trade, you also get a 5%+ dividend yield to boot.