Seeking Alpha
, Random Roger (170 clicks)
Portfolio strategy, ETF investing, foreign companies
Profile| Send Message|
( followers)  

Roger Nusbaum submits: A reader left the following:

Why would you indirectly suggest owning a company oil stock over an ETF? Have the memories of Enron faded that quickly within the market? I am purposely trying to get out of company stock and get into a commodity for a portion of my portfolio.

This is a good comment as it brings up what is realistically a risk to worry about and what isn't. Enron perpetrated a fraud, as did Worldcom. How many reasonably big companies (both of these were of course much larger than reasonably big) and larger are frauds that go to zero? We can define reasonably big as NYSE listed or NASDAQ listed. It happens so infrequently that it is statistically insignificant. There have been a few other companies that have failed for reasons other than fraud, but this is also rare.

Further, Enron was not an oil company -- it was a utility with a huge trading operation.

This may seem cold, but worrying about statistically insignificant events where investing is concerned makes very little sense to me. If you have 3% of your portfolio in the next major fraud you will end up having a bad day, and might set your portfolio back a couple of months. This is not a ruinous outcome.

The reader says he is seeking out a commodity product for this part of his portfolio. Over the last three months United States Oil Fund ETF (NYSEARCA:USO) and iPath Goldman Sachs Crude Oil ETN (NYSEARCA:OIL) have had standard deviations of 27.5 and 27.3 respectively. In that same time BP PLC (NYSE:BP) had a standard deviation of 18.2, ExxonMobil Corp. (NYSE:XOM) 19.6, Chevron Corp. (NYSE:CVX) 19.4 and Total S.A. (NYSE:TOT) 17.8. The Energy Sector SPDR (NYSEARCA:XLE), which might be the least compelling energy ETF out there, comes in at 20.5.

Individual stocks are not right for everyone, and trading a commodity ETF is a valid way to go for people that want to assume that kind of action, but the logic of picking a very volatile commodity ETF over a stock for fear of fraud is lost on me.

An update: I disclosed buying the Currency Harvest ETF (NYSEARCA:DBV), aka the carry trade fund, back in October. I feel like it is living up to its billing of capturing most of the market with less volatility. Over the last three months S&P 500 Index (NYSEARCA:SPY) has a volatility of 7.07 and DBV is 6.14. In that same time SPY is up 4% while DBV is up 3%. While that is fine I think it is too early to know for sure that it is a success.

For now I have no intention of putting client money into this. I prefer the single currency ETFs, they are simpler and have provided a better return.

Source: ETFs vs. Oil Stocks - When to Worry and When Not