Beyond XLE: Five Energy ETFs Flying Under The Radar

by on January 12, 2010 | ETFs Mentioned:

Oil prices have nearly doubled from January 2009 levels, and many investors are once again looking towards energy ETFs as potential beneficiaries of a prolonged jump in prices. But unlike previous oil rallies, the domestic energy sector has delivered a muted performance in the wake of the most recent run-up. The industry followed “black gold’s” upward path and finished 2009 well in the black, but prices were somewhat held in check, frustrating some investors who chose to play an expected oil rally through energy equities.

Heading into 2010, there are already a number of trends emerging in the energy sector. Continued consolidation in the natural gas space is cause for optimism, as many large natural gas firms are being scooped up by their larger integrated oil and gas counterparts in a wave of M&A activity. And rapid growth from emerging markets is also a positive development, as these countries gobble up resources around the world to fuel their impressive expansion.

Historically, an investment in the energy sector entailed the purchase of stock in Exxon and Chevron. Following years of ongoing product development and new fund launches, there are now dozens of ETF offering different ways to play the energy sector. Still, the bulk of the assets remain concentrated in funds that focus that are dominated by mega cap oil companies.

But there’s a lot more to energy investing than Big Oil. Alternative energy is becoming an increasingly important investment area, and increasingly-focused ETFs now offer exposure to various sub-sectors. Moreover, a number of international energy funds offer interesting alternatives to domestic oil and gas sector. Below, we profile five energy equity ETFs presenting unique investment theses that may have been flying under your radar of many investors. ETFdb Pro members can read more about energy ETFs in the ETFdb Category Report (if you’re not a Pro member yet, sign up for a free trial or read more here).

  • Dow Jones Emerging Markets Energy Titans Index Fund (EEO): Some analysts have speculated that the current political environment has kept a lid on domestic energy stocks, as the threat of a windfall profits tax if oil prices rise has diminished the “upside” case for U.S.-based companies. This ETF offers a way to play the energy sector without making big allocations to Exxon, Chevron, or BP. EEO invests in energy companies headquartered in emerging markets, with a tilt towards the BRIC bloc of countries. EEO raced ahead of domestic and global energy funds in 2009, outperforming XLE and IXC by a wide margin.


  • Claymore/SWM Canadian Energy Income Index ETF (ENY): This ETF invests in Canadian oil and pipeline trusts that pay a high dividend yield. The fund seeks to combine the most profitable and liquid Canadian royalty trusts with the most focused and fastest growing oil sands producers using a tactical asset allocation model based on the trend in crude oil prices. If the current quarter’s closing price is above the four quarter moving average price, crude oil is determined to be in a bull phase. If it is at or below the moving average price, crude oil is determined to be in a bear phase. In a bull phase the asset allocation is 70% oil sands and 30% income trusts. In a bear phase the asset allocation is 30% oil sands and 70% income trusts. ENY pays a dividend yield of over 5% and currently holds about 25.


  • First Trust ISE-Revere Natural Gas Fund (FCG): For investor bullish on natural gas but wary about pursuing a futures-based strategy through UNG, this ETF is an interesting option. FCG invests in companies that focus on natural gas production and exploration. The fund focuses on mid cap securities and has an average market capitalization of just under $7 billion. Unlike UNG, which relies on futures contracts, FCG holds stocks of firms that produce the natural gas, generally offering a greater level of stability. The fund also ranks the equities on several qualitative metrics, such as price-to-earnings ratio and return on equity, and selects the top 30 rated securities for inclusion in the fund.


  • iShares Dow Jones U.S. Oil & Gas Exploration & Production Index Fund (IEO): This fund focuses on companies with expertise in the oil and gas exploration and production segment of the energy industry. The fund has a significant concentration in its top ten holdings with nearly 60% of the assets in ten stocks, with about 12% alone in Occidental Petroleum Corp. Other major holdings include Apache, Anadarko Petroleum, Devon Energy, and XTO. IEO has one of the lowest expense ratios in the sector at just 0.48% and it is up over 30% in the past year.


  • PowerShares WilderHill Progressive Energy Portfolio ETF (PUW): This fund invests in companies that focus on energy bridge technologies with an emphasis on improving the use of fossil fuels. It is heavily weighted towards small cap, firms with an average market capitalization of just $4.5 billion. PUW is an intriguing option for investors who believe that higher oil prices will cause companies and consumers to pursue alternative energy sources. The fund also has significant weightings to firms that look to create energy from other sources (such as alcohol) and firms that seek to improve energy storage capabilities as well.


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Disclousre: No positions at time of writing