By Richard Rittorno
It doesn't take a rocket scientist to realize that energy ETFs are not the place to put money to work. A simple glance at the Energy Select SPDR (XLE) chart and it's hard to miss the 6% decline for May.
With the West Texas Intermediate (WTI) oil price falling as much as 15% since the beginning of the month, and Brent Crude (BNO) - the global bench mark - down as well, it should come as no surprise that an oil noose has moved from the consumer to oil-export-dependent emerging market countries.
Take a look at the Market Vectors Russia ETF (RSX). A country that has produced more billionaires from oil than any other is suffering a 17.6% decline in May alone.
Do you see a pattern developing? If the energy sector is selling off and the ripple effect is felt the most within energy names tied to emerging markets, funds that have a combination of energy names are likely in for further pain.
There happens to be two energy ETFs that fit the requirements of energy sector and emerging market exposure. They are the EGShares Energy GEMS ETF (OGEM) and just launched in February, the iShares MSCI Emerging Markets Energy Sector Capped Index Fund (EMEY).
Let's compare the two energy ETFs.
OGEM is a three year old product that contains 30 stocks with $11 million in assets and an annual expense ratio of 0.85% along with a 2.10% distribution yield.
EMEY is four months old, contains 49 stocks, has $9 million in assets and an annual expense ratio of 0.68% along with a 0.0 distribution yield at this time. EMEY was created to be in direct competition with OGEM.
Volumes in both energy ETFs are low with an average daily volume of 3,550 for OGEM, and EMEY stuck in double digits. It's easy to move these names with large orders and limit orders should be the only type being used on these names.
Both funds have well known names such as Russia's Gazprom (OGZPY.PK), Brazil's Petrobras, China's PetroChina (PTR) and CNOOC (CEO) but it's the mix or weight that really sets them apart. OGEM has Russia's Gazprom - a non-OPEC member - weighted at 35%, and another 25% combined in China and Brazil. That same combination in EMEY represents 66% of its country allocation.
Exposure to state-owned Petrobras has not really been a good thing for the past two years: PBR has been the worst performing major oil stock globally. OGEM's 7% weighted position in PBR is concerning, but those concerns are trumped by EMEY's 14.5% allocation of two different Petrobras securities, just over the double the weight of OGEM's position.
Besides carrying half the weight of PBR, OGEM boast a larger weighted position in Colombia's Ecopetrol (EC), which many analysts view as the opposite to Brazil's Petrobras as far as state-run oil companies go. EC represents the 9th largest holding in both energy ETFs, but looking at them from a weighted viewpoint, OGEM holds EC at a 4.36% weighted position, compared to EMEY's 3.24% weighted position.
In order to compare performance equally we compared the two energy ETF's from February when EMEY was launched. EMEY dropped roughly 22% since it started, compared to 21% for OGEM over the same period. Comparing the two funds for May - when crude oil fell off a cliff, OGEM is down a little more than 14%, compared to a little more than 12% for EMEY.
The problem for both these energy ETFs is the fact that current market conditions aren't favorable to owning emerging market or oil stocks. If crude oil remains cheap and continues to slide, so will these two energy ETFs, and it could very well get much uglier for these two. Since neither trade within the options market, to participate in the downside for these you would have to short the ETFs outright - a highly risky trade given the thin volume for these names.
Bottom line: Although it may not be time to jump into these names now - there will be a time. The clear winner in at least my eyes, is OGEM on the premise of its lower exposure to Brazil and PBR, along with its higher average daily volume providing greater liquidity (at the moment) over EMEY.