On this week’s episode of ETF Prime, host Nate Geraci explored the energy investing sector with Stacey Morris, CFA, Head of Energy Research at VettaFi. Afterward, Carlos Pena, Vice President and Portfolio Manager at Texas Capital, joined the podcast to discuss the Texas Capital Government Money Market ETF (MMKT).
More than Expected
Using Morris’ data, Geraci started by noting that among investment sectors, the energy sector is second only to the technology sector in terms of the number of ETFs available for investors. Despite this, the energy sector holds less than 4% of the weight within the S&P 500. With all of this in mind, Geraci asked Morris why there’s such a stark disconnect between energy ETFs and S&P 500 weight.
Morris attributed the ETF spread to the fact that there are many different types of energy. Along with the traditional oil and gas, there are also strategies positioned toward clean energy, nuclear energy, and others.
Even among these energy sectors, there are also crucial subsectors within each category. For example, Morris noted that there are ETFs that focus solely on pipeline companies, while others target wind or hydrogen energy.
“It’s good that there’s a lot of different ways to play this space, but there are a lot of nuances to what can drive performance,” Morris added.
Energy's Top Picks
With so many energy ETFs available on the market, Geraci then asked Morris what some of the largest energy ETFs on the market are like. She noted that the largest energy ETF in terms of AUM is currently the Energy Select Sector SPDR Fund (XLE ), with nearly $38 billion in AUM.
Morris added that XLE’s popularity would likely not come as a surprise to investors. The fund offers broad and low-cost access to the energy sector.
That being said, Morris believes the second-largest energy ETF may come as a surprise to some investors. Possessing over $9 billion in assets under management, the second-largest energy ETF is currently the Alerian MLP ETF (AMLP ).
AMLP focuses on providing exposure to Master Limited Partnerships, or MLPs, which Morris refers to as “a pretty niche segment of the energy space.” The Alerian fund utilizes an index from VettaFi, the Alerian MLP Infrastructure Index, to help do so.
By investing in MLPs, investors can gain access to midstream energy infrastructure. Morris highlighted that this can offer benefits that are unique from traditional energy investing.
“There’s different use cases for midstream,” Morris noted. “Particularly for income, and then also just a lot of tax nuances that can lead to it being helpful to have different options for investing in this space.”
2025 Expectations
Looking ahead, Geraci asked Morris what parts of the energy sector remain on her radar heading into 2024. In regards to oil, Morris remains cautious. As for why, she cited concerns over demand and uncertainty over potential unwinding from OPEC+.
Even so, Morris did not expect oil to get materially worse in 2025. However, she does not anticipate it seeing significant improvement either.
On the other hand, natural gas could see stronger performance next year. Morris assessed that it is probable that natural gas prices may improve next year, even with delays to LNG export projects.
Should oil not see much upside in 2025, Morris asserted that it may create a less attractive environment for some energy stocks. As such, investors may wish to consider a defensive approach that is less linked to oil’s price.
“It’s difficult for energy stocks to do much if oil prices aren’t doing much,” Morris added. “From that perspective, I would favor leaning more defensive and continue to favor midstream in that kind of environment.”
MMKT Explained
To cap off this week’s Episode of ETF Prime, Geraci then brought on Carlos Pena, Vice President and Portfolio Manager at Texas Capital. Highlighting the Texas Capital Government Money Market ETF (MMKT) as the first money market ETF, Geraci asked Pena where the idea to launch the fund came from.
Pena explained that Texas Capital wanted to give investors the benefits of a 2a-7 money market fund within an ETF wrapper. He noted that the ETF wrapper offers a number of benefits over a traditional mutual fund, such as transparency and pricing. When interest rates rose and money market assets saw growth, Pena and his colleagues saw an opportunity to provide a unique strategy.
As for why no one else had made a fund like MMKT before, Pena saw a couple of factors. When fund providers were in a low rate environment, the incentive to create such a product was not as strong. This became all the more true when ultra short duration treasury ETFs began to proliferate. Once rates increased, MMKT was able to release at the correct time.
“Even though MMKT complies with rule 2a-7, MMKT actually has the flexibility within government securities to enhance yield across sectors,” Pena added. “So we’re not just focusing on treasuries or agencies. We’re looking at everything and assessing the relative value and finding the best yield.”
Listen to the entire episode of ETF Prime, featuring Stacey Morris and Carlos Pena
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