Van Eck, the issuer behind the Market Vectors brand name that has brought investors a variety of country and sector specific ETFs, is back at the product development front again with more expansion in the energy space. In the latest release, the company launched an Unconventional Oil and Gas ETF which trades under the clever ticker of FRAK (as in fracking, a popular technique used by many in the industry to extract hydrocarbons from the ground). With this focus, the fund looks to give investors exposure to an index of companies engaged in the coalbed methane, coal seam gas, shale oil, shale gas, tight natural gas, and tight oil sands segments, only investing in firms that are primarily devoted to this corner of the energy industry.
In total, FRAK charges investors 54 basis points a year in fees while holding 44 securities in total, putting the vast majority of its assets in the U.S (71%), although Canadian firms make up just over 28.5% of the product as well. Despite the concentrated nature of the fund and the relatively specialized industry focus, the product is heavily tilted towards large caps as medium and small market capitalization firms make up less than 17% of total assets. In terms of top individual holdings, Occidental Petroleum Corp (OXY), Canadian Natural Resources (CNQ), and Eog Resources (EOG) take the top three spots, accounting for a combined 23.5% of the fund (also read Inside The Forgotten Energy ETFs).
Unconventional Oil & Gas Industry
Thanks to impressive technological advances and relatively high oil prices, many oil and gas firms are able to tap into a variety of once overlooked hydrocarbon deposits. These forgotten zones were known to contain fossil fuels but due to low prices and poor technology, they were unable to be recovered. This has been changing in recent years as hydraulic fracturing has helped to loosen these deposits while advances in horizontal drilling have allowed these finds to be brought up to the surface. Thanks to these trends, oil and gas production has undergone a boom in a variety of markets ranging from the U.S. and Canada, to South America, Europe, and East Asia (see Time To Consider The Small Cap Oil ETF).
These techniques are also gaining in popularity as a way for countries to make themselves more energy independent or to increase exports to resource hungry markets around the globe. This is especially important in traditionally resource poor regions which are finding out that they might be holding onto significant reserves that can help to boost economic development at this uncertain time. Furthermore, the trend could also be good from an M&A perspective, as large integrated oil and gas firms grow more desperate for new reserves. In fact, many integrated oil companies are finding themselves shut off from key growth markets around the world as state-owned or partially state-owned integrated oil firms dominate these new oil producing regions. As a result, the unconventional oil and gas boom could see added interest from potential buyers looking to beef up their technical expertise and access new and relatively untouched fossil fuel supplies (see more on FRAK’s PDF on the fund’s home page).
Risks of the sector
The biggest concern that investors should have when taking a look at this sector comes from an environmental perspective. There is growing concern over how these techniques and the relatively new technologies impact water supplies in the regions. Of greatest worry is how some of the chemicals used in the process stay in the earth and if this can impact groundwater and render it undrinkable. As a result of this, as well as a variety of bad press from many groups, some are looking to ban certain types of fracking until more is known about the process. If this trend becomes more widespread or more environmental concerns hit the market, the boom in unconventional oil and gas could quickly peter out (read Forget WTI, Play Crude With This Oil ETF).
Nevertheless, if these environmental concerns can stay on the back burner, investors could see strong growth in this sector for the foreseeable future. This could be especially true if commodity prices remain relatively high or if the U.S. economy looks poised to take further advantage of the vast supplies of natural gas at its doorstep. If investors are believers in these trends, FRAK represents an interesting choice. Since it is relatively diversified, single company issues aren’t likely to weigh on the product too heavily, allowing investors to play off of the trend from an industry perspective. While this could reduce the overall return, it looks to keep risks to a minimum as well, suggesting that it could be an interesting choice for those who wanted more exposure to the segment but are concerned that new environmental rules could weigh down a few bad apples in the bunch (read Is Now The Time To Buy Russia ETFs?).