Energy ETFs: Six Very Different Ways To Play

by on June 23, 2010 | Updated May 15, 2013 | ETFs Mentioned:

Volatility is nothing new for the energy sector. Recent years have seen the price of crude oil skyrocket to $150 before plummeting to $30, taking the profitability and outlook for an entire industry along for the ride. Outrage at elevated gas prices has sparked intense scrutiny in the past, and clashes between Big Oil and Capitol Hill have become as American as baseball and apple pie. But the uncertainty of the backdrop against which energy stocks are currently positioned is perhaps unprecedented.

The energy sector has been battered since the Deepwater Oil rig exploded in late April, sparking one of the worst environmental disasters in U.S. history and casting British oil giant BP as a corporate villain. The Obama administration has come down hard on BP, pressuring the company to establish a $20 billion escrow fund for all claims and suspend upcoming dividend payments (see Seven ETFs For Investors Mourning The Death Of BP’s Dividend). But there is also a sense that the entire industry will be punished for BP’s transgressions; a proposed six month moratorium on new deepwater drilling could squeeze many energy firms (although a recent ruling puts the ban in jeopardy). Obama has also seized the opportunity to jump-start plans to reduce U.S. dependence on fossil fuels by making the switch to clean energy, a possibility that has further spooked investors. Throw in the potential drag of a euro zone recession on crude prices and the increased buying power of Chinese industries, and the outlook for the energy sector is about as clear as the water in the Gulf of Mexico.

The tremendous rise of the ETF industry has given investors more ways than ever to establish exposure–both long and short–to various corners of the global economy. This certainly applies to the energy sector; while the most popular funds focus on mega-cap oil companies, there is a lot more to the energy sector than Exxon and BP. Below we profile six ETFs offering exposure to the energy sector, each of which maintains very unique risk and return profiles (fore more actionable investment ideas, sign up for our free ETF newsletter).

SPDR Select Sector Energy Fund (XLE)

State Street’s XLE follows the popular Energy Select Sector Index, a benchmark made up of large cap companies from the oil, gas & consumable fuels, and energy equipment & services industries. One of the largest sector-specific ETFs by total assets, XLE’s holdings consist of a number of big U.S. oil firms, as well as service providers like Halliburton and Schlumberger. Unlike most of the following funds, XLE focuses exclusively on U.S. equities, and as such stands to be impacted significantly by developments in Washington in coming months. The ETF charges an expense ratio of only 0.21%.

Claymore/SWM Canadian Energy Income Index ETF (ENY)

ENY measures the performance of the Sustainable Canadian Energy Income Index, a benchmark comprised of about 30 stocks selected from the Toronto Stock Exchange (see Do You Need A Canada ETF?). ENY takes a unique approach to energy exposure; Selections are made from a universe of companies including over 25 TSX-listed Canadian royalty trusts and 20 oil sands resource producers that are classified as oil and gas producers. The goal is 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.” When crude oil is thought to be in a bullish phase (based on closing price relative to four quarter moving average), the fund allocates 70% to oil sands producers and 30% to income trusts, and vice versa when crude is in a bear phase.

Global X China Energy ETF (CHIE)

This ETF tracks the S-BOX China Energy Index, which reflects the performance on the energy sector in China. The fund contains only 23 holdings, with the top ten accounting for over 67% of the total assets. CHIE may be a good choice for investors looking for emerging markets exposure, as the ETF allocates to only Chinese domiciled securities.

In addition to traditional oil & gas companies, CHIE makes a material allocation to alternative energy firms as well. Fiscal woes in Europe have forced cash-strapped governments to drastically cut subsidies, opening the door for China to become a leader in the clean energy race. From an expense perspective, CHIE charges 0.65%.

EG Shares Dow Jones Emerging Markets Energy Titans Index Fund (EEO)

EEO follows the Dow Jones Emerging Markets Oil and Gas Titans Index, a benchmark that represents 30 of the largest emerging market companies in the oil & gas industry. Similar to CHIE, this ETF offers exposure to energy companies domiciled outside the U.S. But unlike the Global X ETF, EEO maintains exposure to a wide variety of countries. The BRIC countries make up four of the five top country weightings, with smaller emerging markets like Poland and Hungary also getting in on the mix.

For investors bullish on oil prices but concerned about the potential for adverse regulatory developments on U.S. energy firms, EEO may be an interesting opportunity. This ETF charges an expense ratio of 0.85%.

iShares S&P Global Energy Index Fund (IXC)

iShares’ IXC tracks the S&P Global Energy Sector Index, a broad-based benchmark measures the performance of the energy sector of global equity markets. Despite the name, this ETF maintains a heavy tilt towards U.S. companies; the breakdown between domestic and international stocks is roughly 50/50. IXC allocates over half of its assets to its top ten holdings, many of which are well-known oil companies. Investors should take note that BP comes in as the third largest holding, making up nearly 6.5% of the ETF’s assets. Schlumberger, another company involved in the Gulf spill, sneaks in at the ninth largest holding. The vast majority of IXC’s assets are invested in the U.S., the UK, and Canada, but there is some emerging markets exposure as well; Brazil and China receive moderate weights. IXC charges an expense ratio of 0.48%.

Jefferies | TR/J CRB Wildcatters Exploration & Production Equity ETF (WCAT)

WCAT seeks to replicate the performance of Thomson Reuters/Jefferies CRB Wildcatters Energy E&P Equity Index. The benchmark measures the performance of equity securities of a universe of U.S. and Canadian listed companies engaged in the production and distribution of oil and natural gas sectors. WCAT’s focus on small cap firms makes the exposure offered somewhat unique. Many components are more speculative investments, engaged in exploration of new oil and gas reserves. WCAT has a number of interesting applications, including as a potential play on a surge in natural gas use or as a complement to mega cap equity exposure. From an expense perspective, WCAT charges 0.65%.

Disclosure: No positions at time of writing.