A Different Way To Energy
Published on Saturday, 09 June 2012 21:46 Written by Todd Shriber
There are nearly 150 ETFs on the market today that can be classified as energy ETFs. That means investors face a daunting task in terms of finding the ETF that best suits their investment objectives. For most investors, priority number one is capital appreciation and that has been tough to come by with equity-based oil ETFs this year as oil prices have fallen roughly 20% over the past five weeks.
Clearly, that hasn’t been good news for the Energy Select Sector SPDR (NYSE: XLE) and the Vanguard Energy ETF (NYSE: VDE), two of the big kahunas. XLE and VDE are well known, highly liquid and cheap, and both are home to the most familiar energy names, along with some more obscure fare with smaller weights.
Really, what XLE and VDE are about is Exxon Mobil (NYSE: XOM) and Chevron (NYSE: CVX). The two largest U.S. oil companies account for over 35% of XLE’s weight and 36% of the Vanguard fund’s weight. Well, there’s a better way to get exposure to the energy sector via ETFs and it comes in the form of the PowerShares Energy Exploration & Production Portfolio (NYSE: PXE).
PXE, which is home to just 30 stocks, features all of the same stocks that XLE and VDE do, but PXE goes about its business in very different fashion. Chevron and Exxon combine for just over 10% of PXE’s weight. In fact, they’re PXE’s third- and seventh-largest holdings, respectively. Occidental Petroleum (NYSE: OXY) and ConocoPhillips (NYSE: COP) are PXE’s top two holdings with a combined weight of 10.5%.
Beyond the different weighting methodology, PXE also offers broader exposure to the various market capitalization spectrums. That is to say, about a third of PXE’s weight is devoted to small-caps, something that some investors might think could be a disadvantage in the current market environment.
In theory, the small-cap allocation should make PXE a laggard compared to XLE and VDE. However, the PowerShares fund’s weighting methodology has lifted to the fund to the head of the class recently. In the past year, the past month, the past six months and year-to-date, PXE has outperformed is larger rivals. Over the past five years, PXE is also the winner. And since PXE debuted in 2005, it has also outpaced XLE and VDE.
About the worst thing that can be said about PXE when compared against its rivals is that its far more expensive at 0.63% per year compared to 0.18% for XLE and 0.19% for VDE. That is an issue to consider for long-term investors. Then again, PXE’s track record when it comes to returns mutes the impact of its higher fees and that’s what truly matters.
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