By Sumit Roy
Bigger isn't necessarily better, as our most recent Commodity ETF Flows report shows. (For those who haven't seen our new feature yet, each Friday we examine how much capital is entering and exiting commodity-related exchange-traded products over the course of the week.)
Last Friday's report revealed a curious phenomenon: Investors have grown leery of energy ETFs, pulling out more than $1.3 billion in assets last week alone, even as they snatched up less traditional energy plays.
It's as if investors can't make up their minds whether they love energy - or hate it.
Last week, investors pulled a whopping $1.4 billion from the sector's behemoth Energy Select SPDR ETF (XLE). This fund, which tracks a portfolio of 41 drilling and energy-service petroleum companies, accounts for almost a quarter of the total assets for all energy-related ETPs. It's up almost 12% year-to-date.
At the same time, investors directed new capital into several smaller energy products. Indeed, the five ETPs that received the most inflows in the period were all energy-related.
Let's take a look at each fund in turn. XLE holds all of the energy components of the S&P 500 and is market cap weighted. It's unsurprising then that the ETF is biased heavily toward massive integrated oil companies, such as Exxon Mobil (XOM), Chevron (CVX) and the like. In fact, those two companies alone represent 31% of the fund.
In contrast, the fund that garnered the most investor capital last week, the SPDR S&P Oil and Gas Exploration and Production ETF (XOP), is equal weighted. Integrated oil companies only represent 10% of its holdings. Much smaller oil and gas exploration and production companies such as Chesapeake Energy (CHK), SandRidge Energy (SD) and a host of others account for 77% of the fund. Thus, XOP offers a more diversified portfolio and higher exposure to smaller companies than XLE.
A competitor to XOP, the iShares Dow Jones U.S. Oil and Gas Exploration and Production Index ETF (IEO), attracted the second-highest amount of investor inflows last week - $45 million to XOP's $98 million. But while the two ETFs offer the same basic theme - petroleum E&P companies - several differences separate the funds.
First, IEO allocates almost 100% of its assets to oil and gas exploration and production companies. In other words, it does not invest in integrated oil companies at all. It is also market cap weighted, meaning it has substantial positions in Occidental Petroleum (OXY), Apache Corporation (APA) and others. IEO's top 10 holdings account for 61% of the fund vs. 16% for XOP.
Both XOP and IEO offer investors solid exposure to oil and gas producers, while shunning the super majors; they just do it in different ways.
They're also more volatile than XLE - unlike another energy-related fund that investors put capital into last week, the Alerian MLP ETF (AMLP).
AMLP is a fund that holds the stocks of energy-related master limited partnerships (MLPs), or "toll road" style firms that tend to operate midstream businesses, as opposed to oil and gas production. In particular, AMLP holds energy infrastructure plays: Think pipeline operators, storage terminal operators and the like.
Because an MLP's revenues depend only on the volume of a commodity passing through its operations and not the price of the underlying commodity itself, the asset is seen as a less volatile play on rising energy demand. MLP yields tend to be high and stable, making them attractive for income-minded investors. Recent fund inflows suggest that investors looking for higher-yield, more-conservative exposure to the energy sector seem to be turning to MLPs with interest. Our April 8 Commodity ETF Flows report revealed that just two weeks ago, investors had piled $191 million into the JPMorgan Alerian MLP ETN (AMJ) as well.
As we examine the fund flows data each week, we will try to spot more interesting trends and investment ideas worth contemplating. Tune in this Friday for our next report.