Energy ETFs: Watch Your Big Oil Weight

by on January 31, 2013 | ETFs Mentioned:

In the wide world of commodity investing, there is perhaps no corner of the market more popular than energy equities, as this volatile yet often rewarding sector has become a staple in many investors’ portfolios. Taking an equity approach to the most heavily traded segment of the commodities market is appealing to many, as this strategy avoids the nuances and complexities of futures tradings as well as the increased risk inherent in these financial instruments. And with the evolution of the ETF industry, investors can now gain cheap and easy access to a wide array of energy equities through a single ticker [see The Ultimate Guide To Screening Energy ETFs].

Whether you are looking for fine-tuned exposure to some of the more “unconventional” corners of the energy market or want to cast a wider net over the entire space, there are dozens of ETF options. A close look under the hood of these funds, however, reveals several factors investors should be mindful of.

Does Your ETF Have Too Much Big Oil?

Many of the funds in the Energy Equities ETFdb Category seek to provide broad-based exposure to the entire energy market, including the exploration, production, distribution, and services aspect of the oil and gas industry. Though the portfolios of the most popular energy ETFs vary in size and scope, there is one commonality found among almost all of these “mega” funds: big oil–more specifically, Chevron (CVX) and Exxon (XOM). Allocations to these two heavy hitters range from as little as 3% to a whopping 40% of a portfolio’s total assets, meaning that the performance of these ETFs is highly dependent on only two stocks. Though significant tilts towards Chevron and Exxon have certainly not harmed ETFs in recent years, any signs of trouble could have serious impacts on bottom line returns [see Energy Bull ETFdb Portfolio].

The table below highlights four of the most popular energy equities ETFs, revealing the closely tied relationship between Chevron and Exxon allocations, portfolio sizes and performance history:

  • Energy Select Sector SPDR ETF (XLE, A)
  • Energy ETF (VDE, A)
  • Dow Jones U.S. Energy Sector Fund (IYE, A)
  • S&P Global Energy Index Fund (IXC, A)

Though there is nothing inherently wrong with energy ETFs allocating a significant portion of assets to two of the top companies in the space, it is important for investors to realize the dependence of Chevron and Exxon in these popular broad-based funds.

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Disclosure: No positions at time of writing.