By Doug Fabian
High and rising gas prices, causing pain at the pump, are sweeping across the nation like an epidemic right now. And while the contagion surely has spread to you and me, the best revenge could be to capitalize on this trend by investing in oil and gas companies. For the next few weeks, we will discuss exchange-traded funds (ETFs) which focus on different segments of the energy industry. We start today with the SPDR S&P Oil & Gas Exploration & Production ETF (XOP).
This non-diversified fund seeks investment results which, before fees and expenses, correspond generally to the performance of an index derived from the oil and gas exploration and production segment of a U.S. total market index. While XOP is similar to PXE, a recent ETF Talk pick, this week's fund differentiates itself from the latter's exclusive focus on a 30-company index by tracking a much broader index. This broadened approach makes the fund more stable. Its price fluctuations, both positive and negative, generally should not be as large as those of a fund with a narrower investment focus.
After a steady 2012, XOP has gained 1.82% so far this year. And, as the chart below shows, the fund has recovered nicely since last June. For those of you interested in dividend income, XOP offers a yield of 1.13%. Oil prices can go one of two ways. If they rise, then XOP will benefit. If they go down due to exploration into new American sources and production methods, like fracking, being allowed and becoming common, then XOP will make further gains.
As an energy ETF, the vast majority, 98.75%, of XOP's holdings are in the energy sector. The balance resides in the basic materials sector. However, no single company dominates the ETF's assets, and no company composes more than 2% of XOP's total assets. Its top 10 holdings make up only 16.46% of the fund's investment. The top five are Valero Energy Corporation (VLO), 1.74%; Hess Corporation (HES), 1.73%; Delek US Holdings, Inc. (DK), 1.72%; CVR Energy Inc. (CVI), 1.66%; and Rosetta Resources Inc. (ROSE), 1.65%.
As demand for energy in the form of oil and gas will rise for quite some time, both exploration and production of those energy sources will continue to be valuable. As XOP has its invisible hand in a broad spectrum of companies across the energy sector and industry, it also will do well, especially in light of the win-win situation mentioned above.
If you want my advice about buying and selling specific ETFs, including appropriate stop losses, please consider subscribing to my Successful Investing newsletter. As always, I am happy to answer any of your questions about ETFs, so do not hesitate to email me by clicking here. You may see your question answered in a future ETF Talk.
Doug Fabian has continued to uphold the reputation of the High Monthly Income newsletter as the #1 risk-adjusted market timer as ranked by Hulbert’s Investment Digest.