Equity: U.S. Oil & Gas Equipment & Services
ETF Investors have three choices in the U.S. Oil and Gas Equipment & Services space, and the funds vary widely in strategy. IEZ tracks a broad, market-cap-weighted index that accurately
“All three funds are riskier than our benchmark, but for different reasons.” reflects a neutral take on the market. IEZ's representative exposure, coupled with its Efficiency and Tradability, is the reason we have selected it as our Analyst Pick for the segment.
XES, on the other hand, tracks a broad, equal-weighted index which produces a portfolio predisposed to small-cap companies. XES' unique equal-weighting strategy is an alternative, but viable, approach to the market which earns it the designation as our Analyst Opportunity for the segment.
Lastly, there's is PXJ, which uses a quant-driven, alpha-seeking index that is narrower in number than the others and registers an average market cap between IEZ's and XES'.
Despite these differences, the portfolios exhibit similar risk profiles. All three funds are riskier than our benchmark, but for different reasons.
IEZ has the heaviest weight in oil-related services and equipment companies like Schlumberger and Halliburton; this is also the most heavily weighted industry in our benchmark. However, it’s the fund’s overweighting of oil and gas drilling firms that are the most likely cause of its heightened volatility, as these firms tend to react more violently to changes in the price of oil and gas than service and equipment firms.
XES has its own industry tilts: heavily overweight oil and gas drilling and underweight oil and gas transportation. It is also positioned farther down the market-cap spectrum by virtue of its equal- weighting scheme. In weighting smaller companies the same as giants like Halliburton, the fund tilts much smaller than our benchmark, increasing risk.
PXJ makes similar industry bets to XES but also goes outside the sector scope of our benchmark. (Insight updated 01/16/17)
ETF.com Efficiency Insight
XES leads in efficiency overall and is the cheapest fund in the segment, with an expense ratio of 0.35%. The fund has also been tax efficient in recent years, as it has not paid a capital
“For cost-sensitive investors, XES will likely be the default choice.” gains distribution since 2007. For cost-sensitive investors, XES will likely be the default choice. For longer-term investors, the fund is here to stay, as it has managed to accumulate significant assets in the segment. IEZ, on the other hand, seems fairly expensive by comparison, at 0.46%. However, it is extremely tax efficient, having never paid a capital gains distribution and carrying over $100 million in realized capital losses. With over $500 million in assets, the fund is certainly under no threat of closing. PXJ is by far the most expensive fund of the segment, charging 0.62% annually for its alpha-seeking approach. Unfortunately, the high fund turnover and quarterly rebalances have wreaked havoc on the funds tracking (the fund has lagged its index by as much as 171 bps over one 1-year period over the past two years). The good news is the funds turnover didnt harm taxable investors, as the fund has no history of paying capital gains. The fund may only have half the assets of its competitors, but with $100 million in AUM, it is no small pup, either. (Insight updated 01/16/17)
ETF.com Tradability Insight
All three funds in the segment can be traded with relative ease, although IEZ is the best bet for serious traders. Over $4 million on average changes hands daily, providing the on-screen
“All three funds in the segment can be traded with relative ease.” liquidity active traders crave. Its large-cap-centric portfolio is the most liquid of the segment, and tiny bid/ask spreads (just 0.04%) reflect this. These factors combined with a lack of persistence of premiums or discounts make it easy to get in and out of IEZ at fair prices that hug iNAV. XES can also be traded quite easily, but its volume is only about half that of IEZ. Still, spreads are just 0.06% without significant premiums or discounts, so investors should be able to trade the fund with ease. Finally, while PXJ reports an average volume of about $500,000 a day, its median dollar volume of about $300,000 better reflects reality. Spreads are manageable at just 4 cents on average, and premiums and discounts have been small historically, but investors would be wise to monitor iNAV closely to make sure they get the best execution possible. Institutions, with the aide of market makers, should have no problem moving large orders. All three funds have strong block liquidity as reflected by the ETF.com implied liquidity scoring. (Insight updated 01/16/17)
ETF.com Fit Insight
IEZ comes closest to replicating the true, heavily concentrated Oil & Gas support market here. The funds largest holding, like our benchmark, is Schlumberger, which clocks in at 22% of
“Neither XES nor PXJ provides strong exposure to our benchmark” the portfolio. The portfolio has 66% of its assets by weight in the top 10 holdings. However, the fund is even more concentrated in oil service and equipment firms which represent over 77% of its holdings. It also makes a heavy bet on oil and gas drilling firms, companies that can exhibit more volatility in periods of big energy price movements. Neither of the other two funds (XES and PXJ) tries to reflect a cap-weighted approach to the market - as our benchmark does. Instead, they make their own set of bets, tilting toward and away from our benchmark sector allocation. Both funds have similar risk profiles so investors must choose which set of tilts theyre interested in before picking these alternatives. XES investors, by virtue of the funds equal-weighting strategy, are making a big bet on small-cap companies and an even larger call on oil and gas drilling firms. Like IEZ, XES has minimal exposure to oil and gas transportation firms. PXJs investors, on the other hand, are putting their faith in a quant-driven index methodology that tries to outperform the broader sector, focusing on companies that pass value, growth and momentum screens. The net result of these screens is a portfolio that makes a hefty bet on small-cap firms. Just like XES, PXJ currently has a big overweight to oil and gas drilling firms matched by a significant underweight in transportation companies.
Unfortunately, all three funds in this segment have underperformed relative to our neutral benchmark over the last 6 months despite their higher market risk - and have therefore generated negative alpha. (Insight updated 01/16/17)