Equity: U.S. Energy
The ETFs in this segment offer very different approaches to the energy space, providing access to everything from the broad market—dominated by names like Exxon Mobil or
“The ETFs in this segment offer very different approaches to the energy space.” ConocoPhillips—to quant-based strategies that attempt to pick winners from the many companies and sub industries in US energy.
VDE, IYE, XLE and the newcomer FENY all deliver broad, market-like sector exposure that ranges from very good to great, though they diverge somewhat on costs and risks. IYE's expense ratio is far and away the highest of these “plain vanilla” funds. In contrast, FENY and VDE have the segment's lowest fee. However, XLE is by far the juggernaut in the segment with massive amounts of AUM. The fund also brings something else to the party: massive liquidity. As one of the most liquid ETFs in the world, XLE trades in the billions on an average day, making its all-in costs from trading and fees the lowest in the segment.
Four other funds offer distinct alternatives to traditional sector exposure due to their strategy or selection universe. PSCE differs the most from the market by focusing exclusively on small-cap energy companies. FXN and PXI use quant strategies to pick winners from the sector instead of merely owning the market like the cap-weighted funds. Finally there is RYE which offers an equal-weighted version of XLE. As they stray from vanilla exposure, all four funds come—in varying degrees—with greater risks, higher price tags and less-than-perfect tracking, but contribute to a well-rounded segment: There’s something for everyone here. (Insight updated 12/11/17)
All Funds (11)
IYE $1.07 B 1067814440 Expensive broad exposure
FENY $468.71 M 468709890 one of the cheapest
VDE $3.93 B 3930267077.62 Inexpensive broad exposure
XLE $16.55 B 16551125185.166 Most liquid
RYE $243.77 M 243774270.86 Small-cap tilt
FXN $227.56 M 227555828.988 Small-cap tilt
PXI $88.32 M 88320000 not cheap to hold
PSCE $51.67 M 51669400 Small-cap focus
ERGF $2.69 M 2686230 N/A
JHME $27.81 M 27807300 N/A
XE $492.27 K 492269.69 N/A
ETF.com Grade as 12/07/17
Equity: U.S. Energy
ETF.com Efficiency Insight
Costs and fund closure risk dominate the Efficiency discussion for US energy funds. XLE is the juggernaut in the segment with expense ratio of 16 bps and incredibly low risk of fund closure
“XLE is the juggernaut in the segment” given its healthy daily volume and AUM.
FENY has actually the lowest expense ratio in the segment (12 bps), but is still too new to fully assess its cost reflecting tracking error.
VDE is the second cheapest fund in the segment (14 bps) and a true contender against XLE. The fund has over $3B in AUM and trades well on average.
Costs play a large role for the remaining funds as well. PSCE charges 29 bps for its exclusively small-cap basket. IYE, RYE, PXI and FXN are even more costly with expense ratios ranging from 40 bps to 70 bps—stiff prices to pay for U.S. equity ETFs.
Unsurprisingly, with the exception of IYE, these funds exhibit the most difficulty in tracking their underlying indexes due to their high fees. IYE lends its portfolio securities, which reduces tracking differences by sharing the lending revenue with investors with the trade-off of slight counterparty risk. Over the typical year IYE's issuer has been able to claw back about 10 bps off the fund's 45 bp expense ratio via securities lending and sound management. (Insight updated 12/11/17)
ETF.com Tradability Insight
U.S. energy funds vary dramatically in Tradability, with XLE reigning over all. For on-screen liquidity, XLE is not only the most liquid ETF in the segment, its one of the most liquid ETFs
“US energy funds vary dramatically in Tradability.” in the world. IYE, VDE and FXN are distant seconds by volume. This should be plenty of liquidity for most investors. These three funds trade multiples of their creation unit sizes, with tight spreads. PXI, PSCE, RYE and FENY occupy the bottom tier of Tradability within the U.S. Energy segment with unremarkable daily dollar volume. These funds should still be tradeable by all but the most active investors. Limit orders are a must, however, as spreads here can be wider than those for the top tier. With the exception of FENY, all funds in the segment can be traded cheaply and easily in blocks of 25,000 shares or more. Despite its lack of block liquidity, retail investors can still buy and sell FENY's shares at tight spreads. (Insight updated 12/11/17)
ETF.com Fit Insight
Segment funds deliver clear choices regarding their portfolios, roughly splitting along the lines of those that try to match the sector and those that don’t.
VDE, IYE, XLE
“Segment funds deliver clear choices regarding their portfolios” and the new offering from Fidelity - FENY all land in the first camp. They aim to deliver the broad market and generally do a great job of it. All four funds follow a market-cap weighting scheme that gives them top-heavy concentration in major players such as Exxon Mobil and Chevron, and generally heavy exposure to the integrated oil & gas industry. However, there are differences to note. For one, XLE selects from a mid-to-large universe (the S&P 500), but due to the capping restrictions of the S&P indexes, the fund ends up with a portfolio slightly skewed toward midcaps. VDE, slightly overweights exploration & production firms, making it a tad riskier than the market. Relative newcomer FENY is the broadest fund in the segment covering 98% of the U.S. Energy market.
The other four funds diverge from the market, and from each other, by nature of their unique strategies. PSCE scores lowest in Fit, but with good reason—the fund doesn’t attempt to represent the broad market—it focuses solely on small-caps that represent just 3% of the sector's market cap. PSCE’s small-cap universe affects industry exposure: It overweights service and equipment firms and completely ignores the integrated oil & gas industry. Though PSCE has outperformed its competitors over the past year, its beta shows that outperformance came from taking more risk, though this shouldn’t surprise (or necessarily deter) investors looking for small-cap energy firms.
Investors looking for an equal-weight strategy should look to RYE. The fund strays from the broad market—it overweights midcap companies with zero exposure to small-caps.
PXI and FXN follow similar strategies: They use quant strategies to select winners within the energy space. While their goals are similar, their selection screens differ. PXI heavily overweights mid- and small-cap stocks. FXN also dips into the small-cap space, but loads up massively on midcaps. Both funds are more risky in comparison to the broad market. FXN and PXI have yet to show the statistically significant alpha their indexes are designed to produce. (Insight updated 12/11/17)