3 Funds to Cash In on an Oil Boom

by Jeff Reeves | September 11, 2013 11:14 am

[1]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[2]), 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[3]), 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[4]),  iShares U.S. Energy ETF (IYE[5]) or the the iShares U.S. Oil & Gas Exploration & Production ETF (IEO[6]).

Here’s a look at each:

Energy SPDR

[7]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[2]), Chevron (CVX[8]) and Schlumberger (SLB[9]), 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

[10]Assets: $1.4 billion
YTD Returns: 18%
Gross Expenses: 0.46%
Dividend Yield: 1.5%

The iShares U.S. Energy ETF (IYE[5]) is in many ways a similar investment to the Energy SPDR, with only slightly different weightings. Exxon Mobil (XOM[2]), Chevron (CVX[8]) and Schlumberger (SLB[9]) 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 

[10]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[6]).

Nearly 100% of this fund is in the exploration and production segment of the energy market, with top holdings that include Occidental Petroleum (OXY[11]), Anadarko (APC[12]) and EOG Resources (EOG[13]) 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[14] is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks.[15] Write him at editor@investorplace.com[16] or follow him on Twitter via @JeffReevesIP[17]. As of this writing he did not own a position in any of the stocks named here.

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