Van Eck, the New York-based ETF issuer best known for its hard asset and country specific funds such as the Gold Miners ETF (GDX) and the Market Vectors Russia ETF (RSX), announced further expansion in the commodity space with plans for an ‘Unconventional Oil & Gas ETF’. If approved, the fund will mark the 41st product from the rapidly growing ETF giant and could help the company grow its assets in the oil space, one of the few areas in which Van Eck’s current lineup is lacking. While many details were not yet released in the SEC filing, expense ratio and ticker symbol are still unavailable, we have highlighted some of the key points from the filing below:
The proposed fund looks to track the Market Vectors Unconventional Oil & Gas Index which seeks to give investors access to a basket of companies that are primarily engaged in a variety of activities related to the exploration, development, extraction, production and/or refining of unconventional oil and natural gas. According to the filing, these ‘unconventional’ oil and gas deposits include those that are in oil sands, oil shales, tight sand, coalbed methane and shale gas. They may also be geographically extensive or deeply embedded in underground rock formations and are difficult to extract and maintain profitably without the use of developing technologies. These developing technologies include, among others, hydraulic fracturing (process of creating or expanding cracks in underground rock formations by pumping a high pressure mixture of water, sand and/or other additives into them) and horizontal drilling (method of drilling a well to reach a reservoir that is not directly beneath the drilling site).
Thanks to relatively high oil prices, investment in these ‘unconventional’ sources of hydrocarbons has soared over the past few years. Most oil supplies are rapidly being gobbled up by emerging markets and state-run oil firms such as Petrobras or PetroChina, leaving Western giants out of the mix and forced to look elsewhere for supplies. Luckily for these firms, oil shale represents a truly massive untapped area of the oil world that can often be found in more politically friendly locales. In fact, according to a recent report from worldenergy.org, the total world shale oil resource is expected to be around 2.8 trillion barrels with at least 1.5 trillion barrels available in the United States alone. Clearly, the potential for the industry is huge, especially if oil prices remain elevated, allowing firms to profitably obtain this oil from these often hard-to-reach rocks [see Oil ETF Investing: Five Ways To Play].
While the industry may be seeing surging fortunes, there is increased worry over the environmental impact of many of the techniques used in the sector. Most methods require heavy usage of metals, chemicals, as well as other non-traditional systems that can upset the ecosystem and cause longer-term problems. Some processes in the gas industry even require pumping a mixture of products into the ground in order to force up the gas closer to the surface and make it easier to capture. While this has undoubtedly helped firms access new gas supplies, questions are beginning to grow over how much of these materials are leaking into groundwater and other local systems, suggesting that the industry may be a high risk play until it can improve its image or develop more environmentally friendly methods [read The Definitive Oil ETF Guide].
Unconventional Oil ETF World
Currently, the ‘unconventional oil’ space is pretty sparse as investors do not have any funds that offer direct exposure to the space. With that being said, investors can achieve some level of exposure with a relatively popular fund from Guggenheim, the Canadian Energy Income ETF (ENY). This fund, which has about $140 million in assets, tracks the Sustainable Canadian Energy Income Index and currently consists of about 30 companies. The underlying index is designed to combine the most profitable and liquid Canadian royalty trusts with the most highly focused and fastest growing oil sands producers using a tactical asset allocation model based on the trend in crude oil prices. So when crude oil prices are surging, the fund allocates more to the oil sands industry and vice versa when prices are determined to be in a bear market [see more on ENY's Fact Sheet].
While this fund from Guggenheim doesn’t offer pure play exposure, it can be close to 70% in oil sands firms, making it a decent proxy for the industry. However, the fund only includes oil sands and only those firms based in Canada, giving investors limited exposure to the broad sector. So although ENY may be a decent play on the unconventional space today, the proposed product from Van Eck, if ever approved, could offer more diversified exposure thanks to its inclusion of a variety of sectors across the industry and over national borders as well [read Three Forgotten ETFs To Play Oil].
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Disclosure: Long ENY.