Equity: U.S. Oil & Gas Exploration & Production
The difference between the 3 U.S. Oil & Gas Exploration & Production ETFs centers on a simple question - what exactly is an oil & gas exploration & production company? Each
“Investors who want the purest exposure possible to the segment will like IEO...” fund answers that question differently, resulting in 3 different portfolios. All 3 funds include some conglomerates in their holdings and as a result devote significant portions of their portfolios to the refining and marketing sector. Of course, such an allocation isnt entirely irrational, since its hard to talk about oil & gas without talking about the giants, but it does tilt them away from our segment benchmark, which focuses only on exploration & production firms. In addition, IEO allocates almost 13% of its portfolio to a single security - ConocoPhillips. IEO, XOP and PXE define their portfolios by different means. IEO selects a broad pool of securities and weights them by market cap - this produces a representative portfolio that helps it earn our Analyst Pick designation for the segment. XOP selects a similarly broad pool, but weights stocks equally. PXE, however, uses a quantitative model to try to pick winners, and then weights them in tiers based on their performance potential. Investors who want the purest exposure possible to the segment will prefer IEO, while frequent traders and fans of equal weighting will favor XOP. PXE, with its high expense ratio and low liquidity, will appeal to investors who are sufficiently intrigued by its quant model to bear its high all-in costs. (Insight updated 01/16/17)
ETF.com Efficiency Insight
XOP is the winner in Efficiency with the lowest expense ratio of 0.35% and tightest tracking - lagging its index less than its cost . In contrast, IEO has missed its index by just 0.57%
“While no clear winner emerges in Efficiency, a loser does: PXE.” over a typical year - slightly more than its expense ratio. All 3 funds seem pricey, though, especially compared to their cousins in the broader U.S. Energy segment: the Vanguard Energy ETF (VDE), for instance, only charges 0.14%.
Even allowing for its high fee, PXE tracks its underlying index poorly. Over the past two years, the fund trailed its index by as much as 1.51% over one 1-year period and by 0.85% over a typical year. Tracking a tiered equal-weighted portfolio that rebalances quarterly can be difficult, but PXEs additional 20 bps of tracking error above its expense ratio is tough to swallow.
All 3 funds are tax efficient, with a history of avoiding capital gains payouts. They've also all accumulated sizable asset bases, making it unlikely that any of them will close in the near future. (Insight updated 01/16/17)
ETF.com Tradability Insight
XOP leads the pack in Tradability, with almost $500 million changing hands most days. In comparison, IEO trades roughly $9 million per day - far less than XOP, but still impressive - while
“XOP leads the pack in Tradability.” PXE trades about $800K per day. While XOP will appeal to those who value liquidity above all else, IEO is sufficiently liquid for everyone else. PXEs much weaker liquidity, on the other hand, can probably only be borne by long-term investors who dont mind swallowing one-time costs to get in and out of their positions. In keeping with its massive trading volume, XOP trades at minimal bid/ask spreads, which average only 0.02%, with IEOs spread slightly wider, at 0.04%. Meanwhile, round-trip transaction fees can be costly for PXE due to much wider 0.13% spreads. Still, underlying liquidity for all 3 funds should support cost-effective block trades with the help of a market-maker.Although XOP and IEO generally trade close to fair value, PXE occasionally trades at a premium or discount, likely a function of its thinner trading days. Investors who are set on PXE should use special caution when trading - compare intraday fair value to quoted prices and use limit orders to manage spreads. (Insight updated 01/16/17)
ETF.com Fit Insight
None of the funds fit our benchmark particularly well, although IEO comes closest. Much of the disparity comes from each fund’s different industry classification system, though
“None of the funds fit our benchmark particularly well.” XOP’s and PXE’s equal- and tiered equal-weighting schemes certainly do their part in skewing their portfolios.
IEO offers a fairly broad, neutral portfolio, hampered mostly by its inclusion of ConocoPhillips. ConocoPhillips' operations extend beyond exploration & production and, at 13% of IEO’s portfolio, it constitutes both significant single-security risk and a heavy tilt toward integrated oil & gas. Still, IEO’s basket represents the industry well, aside from this one stock.
Just like IEO, XOP and PXE are overweight oil & gas refining & marketing. Beyond this, the portfolios of XOP and PXE diverge. XOP equally weights a broad selection of oil & gas companies, most of them pure exploration & production companies. XOP’s equal-weighting scheme tilts it toward small-cap firms.
PXE uses a quant model to select securities, then weights them equally in tiers. The fund invests only about two thirds of its portfolio in pure exploration and production companies. PXE also tilts much smaller than our segment benchmark and like XOP displays a value bias as well.
All told, IEO delivers the best broad-based, market-neutral exposure. However, investors who don’t like IEO’s heavy concentration risk and don't mind a small-cap tilt may prefer XOP’s equal-weighted basket. PXE goes far outside exploration & production in scope, but it may appeal to investors interested in quasi-active security selection. (Insight updated 01/16/17)