This report covers ETFs that hold the stocks of companies in the energy business. The energy business primarily involves oil and gas companies, but in this report we also cover ETFs involving natural gas and coal.
When analyzing the Energy sector, it is important to understand the Global Industry Classification Standard (GICS) because the energy ETFs use GICS classifications to select their holdings. The GICS system splits the Energy sector into two industries: (1) Energy Equipment and Services, and (2) Oil, Gas & Consumable Fuels. These two Industries are then split into various sub-industries.
We have separated the large number of energy ETFs into a variety of groups, each of which we will discuss in more depth. We will first discuss the broad energy ETFs that cover the entire energy sector, and then we will discuss the narrower industry-level ETFs that focus on “Energy Equipment and Services” and “Oil & Gas Exploration and Production.”
U.S. Broad Energy
Energy Select Sector SPDR Fund (NYSEARCA:XLE) – This fund, launched in December 1998, has $8.7 billion in assets under management, which makes it the largest ETF in the energy sector by far. The fund has an expense fee of 0.21%. The fund is part of the SPDR family of ETFs offered by State Street Global Advisors and tracks the Energy Select Sector Index. The index has a 78.4% weight on Oil, Gas & Consumable Fuels, and a 21.6% weight on Energy Equipment and Services. The fund holds 42 U.S.-listed stocks with the largest holdings being Exxon Mobil (NYSE:XOM) (17.4%), Chevron (NYSE:CVX) 13.1%), Schlumberger (NYSE:SLB) (8.3%), ConocoPhillips (NYSE:COP) (5.2%), and Occidental Petroleum (NYSE:OXY) (4.9%).
Vanguard Energy Index Fund (NYSEARCA:VDE) – This fund, launched in September 2004, has $1.645 billion in assets under management. The fund has an expense fee of 0.24%. The fund tracks the MSCI U.S. Investable Market Energy 25/50 Index. The fund holds 160 U.S.-listed stocks but 140 of those stocks have weights of less than 1.0%. The fund holds 71.8% large-cap stocks, 22.4% mid-cap stocks, and 5.8% small-cap stocks. The fund has the largest weights on the following subsectors: Integrated Oil & Gas (46.3%), Oil & Gas Exploration & Production (22.1%), Oil & Gas Equipment & Services (19.3%). The top five holdings are Exxon Mobil (21.4%), Chevron (12.3%), ConocoPhillips (6.1%), Schlumberger (4.6%) and Occidental Petroleum (4.4%).
iShares Dow Jones U.S. Energy Sector Index Fund (NYSEARCA:IYE) - This fund, launched in June 2000, has $868 million in assets under management. The fund has an expense fee of 0.48%. The fund tracks the Dow Jones U.S. Oil & Gas index and holds 92 U.S.-listed stocks. The five largest holdings are Exxon Mobil (24.7%), Chevron (11.8%), Schlumberger (6.9%), ConocoPhillips (5.7%), and Occidental Petroleum (4.9%). The sector breakdown is 74.66% in Oil & Gas Producers, 24.68% in Oil Equipment, Services & Distribution, and 0.59% in Alternative Energy.
Rydex S&P Equal Weight Energy ETF (NYSEARCA:RYE) – This fund, launched in November 2006, has failed to gain much traction and has only $25 million in assets under management. The fund has an expense fee of 0.50%. The fund tracks the S&P Equal Weight Index Energy, holding 41 U.S.-listed energy companies with an equal weight of about 2.4% for each stock.
Figure 1: Broad U.S. Energy ETF Comparison - Energy Select Sector SPDR Fund (XLE)
Broad U.S. Energy Investment Conclusions – Our “Best in Class” choice for the U.S. broad energy sector is the Energy Select Sector SPDR Fund (XLE) because it has the longest track record, the highest assets under management by far, the best liquidity, and the lowest expense fee. The three largest ETFs in the U.S. broad Energy sector all track fairly closely in terms of performance, as seen in Figure 1, which is a 3-year weekly chart. The performance of all three ETFs is similar on other time frames, with no one ETF gaining a big and sustainable performance advantage over the others in terms of performance or risk.
U.S. Energy – Small-Cap
PowerShares S&P SmallCap Energy Portfolio (XLES) – This fund, recently launched in April 2010, has about $50 million in assets under management. The fund tracks the S&P SmallCap 600 Capped Energy Index and holds 22 U.S.-listed small-cap energy stocks. This fund has recently outperformed a comparable large-cap benchmark, as seen in Figure 2, thus potentially making it a good choice for investors who are looking for small-cap exposure in the energy sector.
Figure 2: PowerShares S&P SmallCap Energy Portfolio (XLES) versus Energy Select Sector SPDR Fund (XLE)
U.S. Broad Energy – Quantitative or Enhanced ETFs
PowerShares Dynamic Energy Sector Portfolio (NYSEARCA:PXI) – This fund, launched in October 2006, has $113 million in assets under management. The fund has a net expense fee of 0.65%. The fund is based on the Dynamic Energy Sector Intellidex Index, which uses a rule-based methodology to select holdings based on a variety of investment merit criteria, including fundamental growth, stock valuation, investments and risk factors.
First Trust Energy AlphaDEX Fund (NYSEARCA:FXN) – This fund, launched in May 2007, has $95 million in assets under management. The fund has a net expense ratio of 0.70%. The fund is based on the StrataQuant Energy Index, which is an "enhanced" index that employs the AlphaDEX stock selection methodology. The index ranks the Russell 1000 stocks in the energy sector based on value factors including book value to price, cash flow to price and return on assets and then selects the top 75% of the ranked stocks to include in the index.
Investment Conclusion - As seen in Figure 3, PXI on a 3-year weekly chart substantially outperformed FXN and the broad SPDR Energy ETF XLE, making it a possible choice for an investor who would like to allocate at least part of his or her investment portfolio to an energy ETF that attempts to beat a passive basic energy benchmark.
Figure 3: Quantitative Energy ETF Comparison
U.S. Oil & Gas Exploration & Production
This group of ETFs is focused on companies in the sub-industry sector of “Oil & Gas Exploration & Production” (E&P), thus excluding energy companies that are involved in drilling, services, refining, marketing, storage, and transportation. The E&P companies are more of a pure-play on the business of exploring for and extracting oil and gas and should theoretically have a higher correlation with oil prices than energy services companies, although in reality the correlation is fairly close, as seen in Figure 4.
Figure 4: Broad Energy ETF and Energy Exploration ETF versus Crude Oil Prices
SPDR S&P Oil & Gas Exploration & Production ETF (NYSEARCA:XOP) – This fund, launched in June 2006, has $928 million in assets under management. The fund has an expense fee of 0.35%. The fund tracks the S&P Oil & Gas Exploration & Production Select Industry Index, which represents the oil and gas exploration and production sub-industry portion of the S&P Total Markets Index. The index is actually a little broader than just E&P and has the following sub-industry weights: Oil & Gas Exploration & Production (72.69%), Oil & Gas Refining & Marketing (16.44%), and Integrated Oil & Gas (10.86%). The fund holds 39 U.S.-listed companies. The index is an equally-weighted index, meaning the weight of each stock is the same at about 2.6%. The weight of each component will fluctuate as stock prices move, but the index is rebalanced back to equal weights once a quarter.
iShares Dow Jones U.S. Oil & Gas Exploration & Production Index Fund (NYSEARCA:IEO) – This fund, launched in May 2006, has $439 million in assets under management. The fund has a fee of 0.48%. The fund is based on the Dow Jones U.S. Select Oil Exploration & Production Index, which is a market-cap weighted index of 60 U.S.-listed companies that specialize in oil exploration and production. The five largest holdings are Occidental Petroleum (15.29%), Apache (9.33%), Anadarko Petroleum (8.04%), Devon Energy (7.49%), and EOG Resources (5.58%).
PowerShares Dynamic Energy Exploration & Production Portfolio (NYSEARCA:PXE) – This fund, launched in October 2005, has $82 million in assets under management, which is relatively low for an ETF that has been in existence for more than five years. The fund has a net expense fee of 0.63%. This fund uses the Intellidex system discussed earlier in order to select energy stocks in the E&P sub-industry.
Thomson Reuters / Jefferies CRB Wildcatters Exploration & Production Equity Fund (WCAT) – This fund, recently launched in January 2010, has only $18 million in assets under management. The fund has an expense fee of 0.65%. The fund focuses on small-cap U.S. and Canadian companies involved in the exploration and production of oil and natural gas.
Investment Conclusion – Our “Best in Class” choice in the Energy E&P group is the SPDR S&P Oil & Gas Exploration & Production ETF (XOP) for the following reasons: (1) we like the equal-weighting of the index, which gives smaller-cap E&P companies a bigger influence in the index instead of the index simply being dominated by the larger-cap stocks (like IEO), (2) the fee of 0.35% is lower than 0.48% for IEO, and (3) XOP’s recent performance has been better than IEO, as seen in Figure 5.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.