Van Eck announced today the debut of an exchange-traded fund that offers exposure to companies employing “unconventional” approaches towards producing energy commodities such as crude oil and natural gas. The new Market Vectors Unconventional Oil & Gas ETF (FRAK) will seek to replicate an index comprised of companies operating in segments such as coalbed methane, coal seam gas, shale oil and gas, and oil sands.
Under The Hood
The new ETF will consist of companies that have the potential to generate at least 50% of their revenues from unconventional oil and gas. The underlying Market Vectors index consists of about 43 individual components, with U.S. companies (71%) and Canadian stocks (29%) representing the vast majority of the portfolio. FRAK has a tilt towards large cap companies, as about 84% of the underlying index consists of stocks with a market capitalization of $5 billion or more. The largest individual weightings include:
- Canadian Natural Resources (8.6%)
- Occidental Petroleum (8.4%)
- EOG Resources Inc. (7.2%)
Though there is some overlap between the components of FRAK and other more conventional energy ETFs, this fund will generally offer exposure that is different from the other products in the Energy Equities ETFdb Category. Perhaps the closest competitor will be the Guggenheim Canadian Energy Income ETF (ENY). That fund is linked to an index that includes Canadian oil sands producers, shifting exposures based on trends in crude oil prices [see Reviewing The Forgotten Oil ETFs].
Unconventional Oil & Gas 101
The case for new ways to generate oil and gas is a relatively easy one to make; supply of these resources is finite, and rapidly-expanding emerging markets have dramatically increased their need for fossil fuels in recent years. That creates an opportunity for firms able to access oil and gas deposits and extract these resources from once inaccessible locations.
In general, unconventional oil and gas methods refer to new techniques used to find, extract, and produce energy commodities. It’s important to note that these techniques are often applied to known or existing sources of oil and gas, allowing companies to squeeze additional output from known supplies. In many cases, unconventional approaches are allowing firms to extract hydrocarbons from locations that had previously been discovered but that had been impossible to “unlock.”
Some of the unconventional approaches that have become increasingly common in recent years include:
- Shale Gas: This refers to natural gas locked in sedimentary reservoir rock formations. New technologies allow companies to drill into the rock and extract potentially massive amounts of gas. Huge discoveries of natural gas shales have been made in recent years in the U.S., leading to optimism over the viability of this ETF as a component of the long-term energy equation.
- Coalbed Methane / Coal Seam Gas: This refers to natural gas that has been absorbed into coal, and as such must be extracted from coal beds.
- Oil Sands: Also known as tar sands, this term refers to sand or sandstone that contains a mix of clay and water along with petroleum. Oil sands have only been recently added to the definition of global oil reserves, as new technologies allow for petroleum to be extracted from this mixture.
There are, of course, some risks associated with this corner of the energy market. Most notably, some techniques for extracting natural gas have drawn the attention of regulators and environmentalists. Hydraulic fracturing of “fracking,” a process that involves pumping sand and fluids down a well and into underwater rock formations, is currently the subject of several investigations; the Obama administration recently proposed a $45 million study that will expand upon EPA research on the impact of fracking on drinking water quality.
“We’re pleased to add FRAK to our family of hard assets ETFs,” said Allison Lovett, Vice President of Marketing at Van Eck Global. “As momentum continues to build in this innovative sub-sector of the energy world, companies in this space are poised to lead the way in the discovery and extraction of energy from new and existing sources.”
Disclosure: No positions at time of writing.