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Time to Buy Energy ETFs? by Zacks Investment Research
2012 marked a spectacular year for oil production in the U.S. as production reached record highs. Daily crude output recorded the largest shoot up increasing 779,000 barrels a day to 6.4 million barrels a day, largely thanks to oil shale finds.
The Energy Information Administration (NYSEMKT:EIA) anticipates crude oil production to jump to 7.3 million barrels per day in 2013, up 300,000 from what it had forecast in December. This also indicates 900,000 barrels per day more than what was produced in 2012.
Meanwhile, looking further out, 2014 production is expected to go up to 7.9 million barrels, the highest level since 1988.
Additionally, the decline in the import level indicates that the U.S. is gradually becoming more self sufficient in fulfilling its energy needs. This conviction comes on the back of a number of expansion and development plans set forth for the nation (Crude Oil ETF Investing 101).
If the current trend continues the U.S. may become the world's biggest producer of oil five years down the line. In fact, by the end of 2035, the U.S. is poised to be "energy independent" and start exporting natural gas by the end of the decade (3 Energy ETFs for America's Production Boom).
The current boom in oil production shows little signs of waning which should strengthen the energy ETFs going forward. This may be due to mounting oil prices which have reached a level of $90 a barrel, a solid level that could continue higher if the economy strengthens even more.
With the boost in oil production capacity by most drillers, the U.S. will once again become a leader in energy development. For investors who wish to capitalize on this strength, in basket form, we have briefly highlighted a few of the ETFs tracking the industry below, any of which could be interesting picks:
Energy Select Sector SPDR Fund (NYSEARCA:XLE)
Given the current boom in oil and the bullish trend in production in the U.S., XLE represents an effective way to capitalize on the strength as oil companies play a substantial role in the performance of the fund (5 Sector ETFs Surging to Start 2013).
Oil Gas & Consumables Fuels companies form 79.39% of the ETF portfolio while the rest goes to energy equipment & services. The high level of concentration in the oil sector companies has been a boon for the fund at this point of time.
The fund since the start of the year has posted gains of 7.7%. This is a huge gain when compared with the overall 2012 gain of 5.21%.
The fund is home to 45 stocks in which it invests an asset base of $7.6 billion. The fund appears to be highly concentrated as it is 59.9% dependent on the top ten holdings for its performance.
In fact two oil giants, Exxon and Chevron, take away nearly 32% of the asset base. The fund charges a fee of 18 basis points annually.
iShares U.S. Oil & Gas Exploration & Production ETF (BATS:IEO)
For a pure play in oil production and exploration companies, IEO represents an interesting opportunity. Since its inception, it has been able to amass $325.5 million in asset base and is home to 61 securities.
Company-specific risk appears to be really high in the ETF as indicated by a concentration level of 64.9% in the top ten holdings. In fact, the top most holding Occidental Petroleum Corp plays a very dominant role in the fund holding an asset base of 13.8%.
The fund started 2013 on a strong note as indicated by its year-to-date return of 11.8% while in 2012 it delivered a return of just 4.37%. The oil ETF charges a fee of 46 basis points annually.
Market Vectors Oil Services ETF (NYSEARCA:OIH)
Since OIH's transfer to Market Vectors in Dec 2011, the fund has been able to build a solid asset base of $1.5 billion (Oil Bull Market Is No Place For MLP ETF Investors).
The fund invests its rich asset base in a holding of 26 securities which are mostly large cap companies. However, the fund has not been able to minimize company-specific risk as 70.7% of the asset base goes towards the top ten holdings.
The fund has assigned heavy weightings to the top two holdings namely Schlumberger Ltd and Halliburton Co. The allocation to the two companies stand at 30.5%. The fund charges a fee of 35 basis points annually.
The performance of the fund after the recent rise in oil production and surge in oil prices has been striking. The fund delivered a return of 7.2% year to date.