Rising oil prices and growth make energy ETFs worth looking at—for now.
Energy ETFs are likely to be good tools for investors looking to capitalize on rising oil prices and steady U.S. economic growth in 2011, that many economists see coming in between 3 and 3.5 percent, Standard & Poor’s analysts said.
Energy stocks have generally outperformed the broader stock market in recent months, buoyed by oil prices that have risen above the $90-a-barrel mark, S&P said in its latest MarketScope Advisor report. Oil costs should continue to rise and are likely to average $95.15 a barrel throughout 2012, amid dropping inventories and solid demand, Stewart Glickman, S&P energy and materials equities analyst, said.
“Historically, energy prices are correlated to GDP,” Glickman said in a telephone interview. “Obviously things can go too far, like when oil hit $140 a barrel, and people changed their behavior a bit. But in general, when energy prices go up, GDP goes up.”
He said equity ETFs with direct exposure to integrated oil and natural gas companies are particularly prospective, because they represent just over half the market capitalization of the S&P 500 energy sector.
He singled out a number of ETFs, including the $8.28 billion Energy Select SPDR (NYSEArca: XLE), the iShares Dow Jones U.S. Energy (NYSEArca: IYE), the iShares S&P Global Energy Sector Index Fund (NYSEArca: IXC) and the Vanguard Energy Index Fund (NYSEArca: VDE).
“The energy sector's recent valuation of 13.1 times estimated 2011 earnings per share (EPS) is below the 500's P/E of 13.6, as the unpredictability of oil prices leads investors to generally assign this sector a lower valuation than the broader market. The sector's P/E-to-projected-five-year EPS growth rate (PEG) ratio of 0.9 is below the broader market's 1,” the S&P report said.
While energy prices should continue to see a “gradual upward trend” in the next three to four years, no one is projecting a return to the $140-a-barrel level, Glickman said, while acknowledging the difficulty of energy price forecasting.
Among his picks, XLE is the largest in terms of assets under management, and it’s also the cheapest of the four with an annual expense ratio of 0.21 percent.
But the fund is relatively small in terms of holdings—41 names —and therefore carries more company-specific risk than, say, IXC, which not only has a slightly bigger portfolio, it’s the only one of the four to carry sizable international exposure as well as the one with the largest dividend yield.
Although all four ETFs include huge companies such as ExxonMobil, Chevron, Schlumberger and ConocoPhillips among their biggest holdings, IXC also includes foreign names such as BP, Royal Dutch Shell and Total. About 48 percent of the portfolio is allocated outside the U.S. It also underperformed its three counterparts in the past year.
Looking Outside The Box
Apart from Glickman’s suggestion that investors ought to stick to the biggest names in the energy ETF space, there are plenty of other ways to play rising energy prices.
Among the choices are the First Trust Energy AlphaDEX ETF (NYSEArca: FXN), the Rydex S&P Equal Weight Energy (NYSEArca: RYE) and the 1 ½-year-old EG Shares Emerging Markets Energy ETF (NYSEArca: EEO), which carries Russia, China and Thailand as its biggest country allocations—and is denominated in local currencies.
Also, Invesco PowerShares markets a group of energy ETFs that slices and dices the sector. They include the PowerShares Dynamic Energy Portfolio (NYSEArca: PXI), the PowerShares Dynamic Energy Exploration & Production Portfolio (NYSEArca: PXE) and the PowerShares Dynamic Oil & Gas Services Portfolio (NYSEArca: PXJ).
An even-more-off-the-beaten-path option is to focus on the uranium industry via the newcomer Global X Uranium ETF (NYSEArca: URA), launched in November. The fund, which is heavily invested in Canada and Australia, holds names like Cameco, Paladin Energy, Uranium One and Energy Resources of Australia.
URA has collected $159.1 million in assets, making it the No. 2 nuclear-energy-related ETF after Van Eck Global’s Market Vectors Uranium + Nuclear Energy (NYSEArca: NLR), which had $263.5 million in assets as of Jan. 20, according to data compiled by IndexUniverse.com.