The energy sector has been sluggish in recent years, but 2013 has given a boost to oil and gas stocks.
Geopolitical unrest in the Middle East has resulted in a “risk premium” for crude, a weaker dollar has slightly lifted commodity prices, and hope of a turnaround in European manufacturing has emerged in recent months.
As a result, we have seen a lift to a number of energy plays.
But naturally, not all oil stocks are created equal. Consider megacap Exxon Mobil (XOM), which is up a mere 2% year-to-date in 2013 vs. 18% for the S&P 500, or nationalized Chinese oil stock CNOOC (CEO), which is slightly in the red this year.
If you’re picking individual stocks, there’s a chance you might get burned. But if you’re looking for a long-term energy investment that is rising right now, consider one of these three diversified oil and gas ETFs — the Energy SPDR (XLE), iShares U.S. Energy ETF (IYE) or the the iShares U.S. Oil & Gas Exploration & Production ETF (IEO).
Here’s a look at each:
Assets: $8 billion
YTD Returns: 17% vs. 18% for the S&P 500
Gross Expenses: 0.18%, or $18 annually on every $10,000 invested
Dividend Yield: 2%
The biggest energy ETF by far is the Energy SPDR (XLE) fund, which boasts $8 billion in assets.
Top holdings include Exxon Mobil (XOM), Chevron (CVX) and Schlumberger (SLB), with these three plays making up more than a third of the entire asset allocation. Sector-wise, the fund is about 79% in direct oil and gas plays, which include integrated oil stocks like XOM, and roughly 21% in energy equipment and service stocks like SLB.
The yield in this fund is slightly higher and the expenses slightly lower than its competitors, making it a top fund in the energy ETF space for good reason.
iShares U.S. Energy ETF
Assets: $1.4 billion
YTD Returns: 18%
Gross Expenses: 0.46%
Dividend Yield: 1.5%
The iShares U.S. Energy ETF (IYE) is in many ways a similar investment to the Energy SPDR, with only slightly different weightings. Exxon Mobil (XOM), Chevron (CVX) and Schlumberger (SLB) make up the top three again, but this time they represent about 42% of the entire fund — with XOM alone a whopping 22% of the portfolio.
This overweighting would be great if Exxon picks up, but since the megacap has lagged, that has obviously held back IYE lately as a result.
Also, about 25% of IYE is focused on service and equipment stocks for a slightly higher weighting, and there’s also a smattering of alternative energy picks for good measure — though they represent less than 1% of the total makeup for this ETF.
iShares U.S. Oil & Gas Exploration & Production ETF
Assets: $480 million
YTD Returns: 22%
Gross Expenses: 0.46%
Dividend Yield: 0.85%
If you want to forgo the megacaps either because you own individual shares or want to tap into bigger growth potential, consider the iShares U.S. Oil & Gas Exploration & Production ETF (IEO).
Nearly 100% of this fund is in the exploration and production segment of the energy market, with top holdings that include Occidental Petroleum (OXY), Anadarko (APC) and EOG Resources (EOG) at the top of the list; that trio represents about 30% of total assets.
You won’t find a lot of dividend potential here, and the plays are much more volatile since they can more easily be exposed to market pressures such as a demand drop or a jump in oil prices. But when you’re bullish on energy, this could be a good thing. Take the 22% returns year-to-date as proof, as this energy ETF has handily outperformed the market despite some of the laggards in Big Oil.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP. As of this writing he did not own a position in any of the stocks named here.