Why OOK Is Crushing XLE

by on February 17, 2010 | ETFs Mentioned:

Last year saw more than 100 new ETF launches, ranging from the relatively “plain vanilla” to funds offering more targeted and unique exposure. One of the more interesting product launches came late in the year, when Geary Advisors introduced the first state-specific ETF, the Oklahoma Exchange-Traded Fund (OOK).

OOK is designed to track the performance of the SPADE Oklahoma Index, a modified market capitalization-weighted benchmark that measures the performance of companies whose corporate headquarters are located in Oklahoma or who maintain significant operations in Oklahoma. Given this objective, it isn’t surprising that the index has a heavy tilt towards the energy industry, as the drilling & exploration, pipelines, oil & gas, and coal sectors make up about 70% of the benchmark. The remainder of exposure is spread across utilities, financials, and consumer companies, giving OOK some level of diversification while maintaining a heavy tilt towards oil and gas companies. Essentially, OOK is to the energy sector what QQQQ is to technology.

When OOK launched, some investors were skeptical on the methodology behind a state-specific investment strategy, despite the impressive backtested results. OOK is just over three months old, but the early results have been impressive. Since November 2009, OOK has outperformed the S&P 500 SPDR (SPY) by about 600 basis points, and is up nearly 10% on the Energy Select Sector SPDR (XLE):

OOK Has Turned In An Impressive Performance Since Its Launch

So why has OOK outperformed XLE by such a wide margin in recent months? First, OOK’s allocation towards companies engaged in the extraction and delivery of natural gas–a relatively minor component of XLE–has given the fund a boost. The JPMorgan Alerian MLP Index ETN (AMJ) and First Trust ISE-Revere Natural Gas Index Fund (FCG – included in the graph above), two popular ETFs offering exposure to natural gas prices through equities, have also performed well in recent months as well (see Three ETF Alternatives To UNG).

But OOK has also received a boost from its non-energy components. BOK Financial and BancFirst, which make up 5% of the fund in aggregate, have surged in line with the financial sector. Dollar Thrifty and is up more than 30% since November, while Pre-Paid Legal Services has also rallied in recent months. Meanwhile, XLE’s oil and gas components have weighed the fund down in recent months as crude oil prices have been weighed down by rising inventories and a rallying dollar.

Many investors gravitate towards the largest and best-known ETF when seeking sector exposure, but focusing exclusively on the “top dogs” can mean missing out on (see Beyond XLE: Five Energy ETFs Flying Under The Radar for a look at more interesting options for energy exposure). OOK may be an efficient way to gain energy exposure for certain investors, or serve as an effective complementary holding to XLE. As evidenced by the significant performance gap between the two funds, there are corners of the energy market not covered by XLE. Moreover, because OOK caps the allocation to any single stock at 7.5%, it doesn’t face the concentration issues that have the potential to create a drag on many sector funds. More than 30% of XLE is invested in Exxon and Chevron, limiting the degree of diversification provided.

With most ETF products, there is a noticeable trade-off between the expenses and granularity of exposure available: the more targeted the product or specialized the investment strategy, the higher the expense ratio (FCG, which charges 0.60%, is an excellent example). But OOK bucks this trend as well, charging just 0.20%, less than even the energy SPDR (XLE charges 0.21%).

OOK is still a young fund, but the performance to date has been impressive, and it is slowly gaining traction with investors in all geographies. We’ll be keeping an eye on the fund throughout the year, curious to see if the outperformance continues and investors buy into the methodology. For updates on this ETF and all ETFs, sign up for our free ETF newsletter.

Disclosure: No positions at time of writing.