3 ETFs to Play the Energy Sector

by Jeff Stouffer | September 12, 2011 11:22 am

The world’s appetite for energy surely will continue to grow. But the companies that provide the demand range from high quality to highly speculative. In trying to play the energy sector, numerous funds and ETFs have set guidelines about what portion of this spectrum they want to occupy.

The Energy Select Sector SPDR (NYSE:XLE[1]) ETF has been around for more than 10 years. XLE invests in the stocks of energy companies that are listed in the S&P 500 Index. Management of XLE has discretion in investment choice and weighting. The top 10 holdings are:

• Exxon Mobil (NYSE:XOM[2]): 17.18%
• Chevron (NYSE:CVX[3]): 13.41%
• Schlumberger (NYSE:SLB[4]): 7.77%
• ConocoPhillips (NYSE:COP[5]): 4.99%
• Occidental Petroleum (NYSE:OXY[6]): 4.69%
• Halliburton (NYSE:HAL[7]): 3.55%
• Apache (NYSE:APA[8]): 3.46%
• Anadarko Petroleum (NYSE:APC[9]): 2.82%
• Marathon Oil (NYSE:MRO[10]): 2.8%
• National Oilwell Varco (NYSE:NOV[11]): 2.67%

XLE’s performance[12] is just as volatile as the energy sector as a whole. Not all investors may be impressed with the idea of playing Big Oil right now, so if you’re on the other side of the trade, remember: You can always short these funds too and play the downside of the energy sector.

The PowerShares Dynamic Energy ETF (NYSE:PXI[13]) is based on a grouping of stocks that make up the Dynamic Energy Sector Intellidex Index. This group includes a wide range of stocks as measured by market capitalization. The group also contains growth and value stocks. The combination of styles and capitalizations creates a mix that delivers returns exceeding the S&P 500 by a wide margin. The top 10 holdings of this ETF are:

• EQT Corp (NYSE:EQT[14]): 2.70%
• Valero Energy (NYSE:VLO[15]): 2.66%
• Williams Partners LP (NYSE:WPZ[16]): 2.6%
• Hess Corp (NYSE:HES[17]): 2.58%
• FMC Technologies (NYSE:FTI[18]): 2.51%
• Baker Hughes (NYSE:BHI[19]): 2.5%
• El Paso Corp (NYSE:EP[20]): 2.5%
• National Oilwell Varco (NYSE:NOV[11]): 2.45%
• Chevron (NYSE:CVX[3]): 2.45%
• Devon Energy (NYSE:DVN[21]): 2.45%

PXI appears to limit exposure to any one stock to less than 3% of the overall portfolio. This risk management technique has served well in the ETF’s five-plus years of existence.

Lastly, an ETF that is tied to the Dow Jones Index is the iShares Dow Jones US Energy ETF (NYSE:IYE[22]). The index is based on oil and gas, producers, distribution and services companies. IYE appears to be more conservative in performance when compared to other ETFs in this space. The top 10 holdings are:

• Exxon Mobil (NYSE:XOM[2]): 24.365%
• Chevron (NYSE:CVX[3]): 13.24%
• Schlumberger (NYSE:SLB[4]): 7.12%
• Concoo Phillips (NYSE:COP[5]): 5.98%
• Occidental Petroleum (NYSE:OXY[6]): 4.69%
• Halliburton (NYSE:HAL[7]): 2.69%
• Apache (NYSE:APA[8]): 2.64%
• Anadarko Petroleum (NYSE:APC[9]): 2.48%
• National Oilwell Varco (NYSE:NOV[11]): 1.87%
• Devon Energy (NYSE:DVN[21]): 1.81%

This distribution shows that IYE is heavily reliant on both Exxon and Chevron to drive the returns. With almost 40% in these two stocks, you’re not getting much diversification.

Jeffrey L. Stouffer is the principal of Mercantile Capital Group, a Herndon, Va.-based introducing broker registered with the CFTC and a member of the National Futures Association. He can be reached at mercapitalgroup@aol.com[23]. He has no direct or indirect holdings in any of the aforementioned ETFs.

Source URL: https://investorplace.com/2011/09/3-etfs-energy-stocks-big-oil/

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