Deepwater Spill Contaminates More Than Just Water: Oil ETFs Plunge

by on May 17, 2010 | ETFs Mentioned:

In recent weeks, no news story has dominated headlines as much as the ongoing saga playing out in the Gulf of Mexico, better known as the Deepwater Horizon oil spill. It has been nearly a month since an oil well blowout caused an explosion 40 miles southeast of the Louisiana coast, sparking what has already become one of the worst environmental disasters ever. Conflicting reports over the size of the leak have come out in recent weeks, with some groups claiming that the amount of oil spilling into the ocean is significantly greater than initial estimates.

As teams scramble to contain the massive spill in the Gulf of Mexico, some investors are feeling the repercussions on Wall Street. The price of crude oil wasn’t materially effected by the spill–the massive quantities pouring into the ocean represent only a fraction of global supplies–but several ETFs have been hit hard by the fallout.

Following several failed attempts to cap the leak, oil executives are now facing the wrath of an angry public and lawmakers out to score some voter points. President Obama has vowed to end the oil industry’s “cozy relationship” with regulators, and the future of offshore drilling–a major victory for Big Oil earlier this year–is now in doubt.

At its current rate, the spill will more than likely top the infamous Exxon Valdez spill off the coast of Alaska in 1989, which dumped 11 million gallons and is still synonymous with reckless corporate behavior. With the oil industry bracing for the long-term consequences of the latest disaster, we highlight several ETFs that may be in focus as this situation continues to play out (for more ETF insights sign up for our free ETF newsletter):

HOLDRS Merrill Lynch Market Oil Service (OIH)

OIH, like most HOLDR funds, has a high concentration in just a few different holdings (see Five Surprising Facts About HOLDRS). Its top two holdings, Transocean and Schlumberger, make up roughly 27% of the entire fund. Transocean in particular is linked to the Deepwater Horizon spill; the company operated the rig that exploded and caused the leak. Schlumberger and Halliburton, OIH’s third largest holding, also have ties to the spill, placing this fund in a tough position (see all of OIH’s holdings here). The ETF is down about 10% in the past two weeks alone and could remain under pressure as long as its major components remain under scrutiny.

PowerShares Dynamic Oil Services (PXJ)

PXJ tracks the Dynamic Oil & Gas Services Intellidex Index, an index comprised of stocks of oil and gas services companies. PXJ has Halliburton and Schlumberger in its top ten holdings as well, although the allocation is not nearly as significant as OIH. As oil services firms have been hit by a double whammy of falling prices and an uncertain regulatory future, PXJ has stumbled; this ETF is down about 5% on the year and almost 8% over the last two weeks (see PXJ’s full fundamentals here)

iShares Dow Jones U.S. Oil Equipment & Services Index Fund (IEZ)

IEZ tracks the Dow Jones U.S. Select Oil Equipment & Services Index, a benchmark that measures the performance of the oil equipment and services sector of the U.S. equity market. This ETF had been enjoying an impressive start to the year, but has fallen on hard times in recent sessions; it’s down almost 9% in the last 2 weeks. Once again the holdings point to possible reasons as the why IEZ has hit a rough patch; its top two holdings are Schlumberger and Halliburton (see IEZ’s performance charts here).

WisdomTree International Energy Sector Funds (DKA)

DKA tracks the WisdomTree International Energy Sector Index, a benchmark measuring the performance of dividend-paying companies in developed markets outside of the U.S. and Canada within the international energy sector. DKA’s top holding is BP, which accounts for about 8% of assets. BP is the largest name linked to the oil spill and took full responsibility for the event, pledging to pay for the damages (see more about this ETF on its fact sheet).

Disclosure: No positions at time of writing.