Oil-Rich Country ETFs: A Proxy for Rising Prices

 |  Includes: EWC, RSX, USL
by: Tom Lydon

When it comes down to oil exchange traded funds (ETFs), you can go a few different routes: you may choose direct exposure through energy commodities or energy producers, or there’s the indirect route with oil-rich countries.

But can that historic correlation between oil ETFs and oil-rich countries be counted on? It depends.

Jonathan Bernstein for ETF Zone notes that while the United States 12-Month Oil ETF (NYSEArca: USL) and iShares MSCI Canada (NYSEArca: EWC) showed similar movements during the crisis starting in Egypt, investors traded down Middle East ETFs due to higher political risk.

Oil assets in the Middle East are usually stated-owned and not available for investment, while the majority of holdings in Middle East ETFs are in the financials sector. That could make them a riskier than normal bet right now if you’re looking to them to play oil.

The good news is that there are other oil-rich countries with less volatility and political risk. iShares MSCI Canada (NYSEArca: EWC) holds about a third of its assets in financials and around 25% in energy. Russia ETFs like Market Vectors Russia (NYSEArca: RSX) have some degree of political risk, but nothing like the Middle East right now. Russia ETFs can hold as much as 40% of their assets in the energy sector, making them a decent proxy for high prices.

Countries with the largest pool of oil reserves include Saudi Arabia, Canada, Iraq, Iran, Kuwait, Venezuela, United Arab Emirates, Russia, Libya and Nigeria. More than 50% of the proven oil reserves reside in the Middle East, and 75% of reserves are in OPEC member states – OPEC makes up 55% of all oil traded in global markets.

If you are considering country-specific ETFs as a play on oil prices, factor in political risk when evaluating the ETF.

Max Chen contributed to this article.