The Jefferies | TR/J CRB Wildcatters Exploration & Production Equity ETF (WCAT) began trading this week, offering investors a way to gain exposure to equity securities of a global universe of companies engaged in the production of oil and natural gas sectors. The index underlying WCAT is a modified cap-weighted benchmark. To be eligible for inclusion, companies must maintain a market capitalization between $200 million and $2 billion and must generate at least 75% of annual revenues from the exploration and production of oil and natural gas.
WCAT allocates approximately two-thirds of its holdings to U.S. companies, with the remainder focused on Canadian equities. When allocated by proven reserves, about 66% of the underlying index is composed of natural gas firms, with 32% allocated to oil companies.
WCAT has about 55 holdings, with the top ten accounting for just over 40% of total assets. Currently, the largest allocations are given to Forest Oil Corp., Encore Acquisition, and St. Mary Land & Exploration Co.
WCAT joing a crowded list of ETFs investing in equities of energy firms, but the new fund differentiates itself in several ways. First, the focus on small cap stocks is somewhat unique, as most energy funds maintain significant allocations to mega cap companies such as Exxon, Chevron, and BP. Small cap energy stocks will generally offer a higher beta and may serve as more of a “pure play” on the prices of the underlying commodities.
The term “wildcatter” generally refers to a person or company that drills oil wells in areas not known to be oil fields, indicating that many of the companies included in this fund maintain speculative, risky operations. Given the volatility inherent in any investment in a single wildcatter stock, the diversified exposure to this sub-sector offered by the ETF approach becomes particularly appealing.
WCAT could compete with the First Trust ISE-Revere Natural Gas Fund (FCG) or the iShares Dow Jones U.S. Oil & Gas Exploration & Production Index Fund (IEO), but neither of these funds has much overlap with the new Jefferies fund.
Alternative to UNG?
Natural gas has become a tremendously popular investment option over the last year, as expectations for regulation favoring clean energy alternatives to crude oil have raised expectations for widespread adaption. And while the rise of the ETF industry has democratized the business of commodity investing, many investors have learned the hard way that a futures-based strategy comes with a number of complexities that have the potential to erode returns (see What’s Wrong With UNG? for a look at how contango has impacted the United States Natural Gas Fund).
WCAT presents a compelling alternative for investors looking to make a play on natural gas, but hesitant to pursue a futures-based strategy to do so (see three more ETF alternatives to UNG here).
Disclosure: No positions at time of writing.
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