Riding Energy Fund XOP With Hedging Option

August 05, 2014

Cooling energy sector offers potential upside in an uncrowded trade.

This article is part of a regular series of thought leadership pieces from some of the more influential ETF strategists in the money management industry. Today’s article is by Kim Arthur, chief executive officer and founding partner of San Francisco-based Main Management.

Energy is something we live with on a daily basis. Drive your car, and you’ll need to fill it up. Whether it’s electric or hybrid, you’ll need an energy source.

Whenever there is a geopolitical flare-up—this time we have Iraq, Gaza and Russia—we become even more sensitized to energy as we watch Brent crude and WTI crude prices creep ever higher. (Brent is a proxy for European/global prices and WTI for U.S. prices.) Currently, those prices are $105 and $97, respectively. How can you play this commodity and geopolitical scenario?

One way is to purchase the SPDR S&P Oil & Gas Exploration & Production ETF (XOP | A-52). XOP gives you exposure to 88 holdings, of which 80 percent are exploration and production (thus the name), and 15 percent are refining and marketing. The embedded fees are 35 basis points, or $35 for every $10,000 invested, and the fund has almost $1 billion in assets. This is predominantly a large-cap holding, with the weighted average market cap at $19 billion.

Given the 88 holdings, this fund is very diversified and not top heavy. What I mean by that is the top 10 holdings are less than 15 percent of the total assets.


Chart courtesy of StockCharts.com


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