Get Down & Dirty With the New Oil Sands ETF

by Aaron Levitt | June 15, 2012 10:51 am

As our growing global population continues to crave more energy, E&P firms have literally gone to the ends of the earth[1] to meet those demands. Tapping these unconventional assets has become the norm in oil and gas sector.

Likewise, exchange-traded fund sponsors have been rolling out numerous new ways for investors to “tap” these opportunities.

Fresh off of the recent release of Van Eck’s Market Vectors Unconventional Oil & Gas ETF (NYSE:FRAK[2]), another issuer has caught the unconventional bug. Focusing strictly on the oil sands subsector of the energy markets, Sustainable Wealth Management — through Exchange Traded Concepts’ ETF-In-A-Box — has entered the ETF market with its first fund, the new Sustainable North American Oil Sands ETF (NYSE:SNDS[3]).

The Opportunity in Oil Sands

While much of investors’ fervor in the unconventional space has gone toward hydraulic fracking and shale gas production, higher energy demand and sustained higher oil prices are helping to breathe new life into oil sands, or bitumen production. While oil sands are found across the globe, Canada and Venezuela hold the largest deposits[4]. Canada is home to an estimated 170 billion barrels of the stuff, or about 70% of the world’s oil sands deposits.

The oil sands industry represents an increasingly important piece of hydrocarbon growth in North America. Production is set to explode during the next few years, as Canada is already seizing the opportunity to export its bounty[5].

Derek Gates, founder of Sustainable Wealth Management, sums up the oil sands opportunity in the fund’s press release, saying, “The Canadian oil sands represent the majority of proven oil reserves outside of OPEC nations; the sands are the top supplier of crude oil to the U.S. and are rapidly expanding production capacity over the next decade. Companies invested in the development of Canada’s oil sands stand to be key beneficiaries of these trends.”

However, the opportunity isn’t without controversy. The various methods used in turning oil sands into fuel have had some environmentalists up in arms. Some analysts maintain that the process might be doing more harm to the environment than good, with oil sands production creating two to four times as much greenhouse gases as with conventional oil drilling. At the same time, the open pit mines created can do irreversible damage to landscape and ecosystem. The main reason that TransCanada’s (NYSE:TRP[6]) Keystone XL pipeline created so much controversy[7] wasn’t the pipe itself, but that it would be carrying the results of bitumen production.

Digging Into the New ETF

So with the unconventional opportunity in bitumen standing before investors, how exactly does the new Sustainable North American Oil Sands ETF stack up? Well, the jury still is out on that one.

SNDS will track an equal-weighted index[8] that is designed to measure the performance of companies whose operations include oil exploration and production (E&P), refinement, marketing, storage, transportation and provision of equipment/services in North American oil sands. SNDS will hold between 25 and 40 stocks that will rebalance quarterly.

To be included in SNDS benchmark index, companies must have at least a $3 billion market cap, be traded on a North American exchange and have a 100-day average trading volume of at least $5 million. The index may include pipeline master limited partnerships as well. Currently, the fund contains 31 different oil sands-related firms[9], and as expected, leading bitumen producers such as Suncor (NYSE:SU[10]), Baytex Energy (NYSE:BTE[11]) and Nexen (NYSE:NXY[12]) all make the cut.

However, after those major holdings, the index begins to deviate. Other holdings in the new fund include major integrated oil firms such as Exxon Mobil (NYSE:XOM[13]), ConocoPhillips (NYSE:COP[14]) and PetroChina (NYSE:PTR[15]). While these firms all do own oil sands assets and do have some bitumen production capabilities, these operations are a very small part of their overall business models — although Conoco has been repositioning itself as strictly North American play[16] these days. The same can be said for other fund constituents like construction firm Chicago Bridge & Iron (NYSE:CBI[17]) and pipeline firm Kinder Morgan (NYSE:KMI[18]).

Investors thinking they are getting access to just the Canadian oil sands are getting the short end of the stick. The ETF’s performance will not be entirely tied to the oil sands market. Broad trends in the energy universe, along with geopolitical issues, will weigh heavily on many of SNDS’ holdings. Direct growth in oil sands demand might not directly translate into solid gains for the ETF.

Those looking for a better play on the unconventional space might want to consider Van Eck’s FRAK. At least that fund is more closely tied to the “unconventional asset” theme, with its underlying index requiring that firms derive more than 50% of their revenues from defined unconventional sources of energy including shale, coal-bed methane/seam gas and oil-sands assets.

For those investors still wanting straight oil sands exposure, my perennial favorite[19] — the Guggenheim Canadian Energy Income (NYSE:ENY[20]) still makes a better oil sands play than the so-called “dedicated” ETF.

The new ETF does have something going for it: SNDS has the highest distribution yield and lowest expenses of the three choices in the space at 3.15% and 0.5%, respectively. However, that probably won’t be enough to entice investors away from the other better options.

As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.

Endnotes:
  1. ends of the earth: http://investorplace.com/2012/05/talisman-best-play-on-vietnams-energy-riches/
  2. FRAK: http://studio-5.financialcontent.com/investplace/quote?Symbol=FRAK
  3. SNDS: http://studio-5.financialcontent.com/investplace/quote?Symbol=SNDS
  4. Canada and Venezuela hold the largest deposits: http://oilsands.infomine.com/countries/
  5. export its bounty: http://investorplace.com/2012/05/canada-gets-serious-about-energy-exports/
  6. TRP: http://studio-5.financialcontent.com/investplace/quote?Symbol=TRP
  7. created so much controversy: http://investorplace.com/investorpolitics/political-battlefield-shifts-to-sabine-pass/
  8. will track an equal-weighted index: http://www.swmetfs.com/funds/SNDS
  9. 31 different oil sands-related firms: http://www.swmetfs.com/funds/snds_holdings
  10. SU: http://studio-5.financialcontent.com/investplace/quote?Symbol=SU
  11. BTE: http://studio-5.financialcontent.com/investplace/quote?Symbol=BTX
  12. NXY: http://studio-5.financialcontent.com/investplace/quote?Symbol=NXY
  13. XOM: http://studio-5.financialcontent.com/investplace/quote?Symbol=XOM
  14. COP: http://studio-5.financialcontent.com/investplace/quote?Symbol=COP
  15. PTR: http://studio-5.financialcontent.com/investplace/quote?Symbol=PTR
  16. strictly North American play: http://investorplace.com/2012/05/can-conocos-divide-and-conquer-plan-win/
  17. CBI: http://studio-5.financialcontent.com/investplace/quote?Symbol=CBI
  18. KMI: http://studio-5.financialcontent.com/investplace/quote?Symbol=KMI
  19. my perennial favorite: http://investorplace.com/2012/01/keystone-or-not-the-big-winner-is-canada/
  20. ENY: http://studio-5.financialcontent.com/investplace/quote?Symbol=ENY

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