Earlier this year, the energy sector, specifically in the oil
space, was one of the more popular segments in the market. Crude
oil was surging and any company related to this sector was on the
rise as a result.
However, recent events have made many investors pause when it
comes to investing in the space. Many European countries are
already in a recession while there are concerns that are building
over the health of not only the American market, but the pace of
growth in Asian nations as well.
Yet despite these concerns, the space could be promising for a
long term, or even medium term outlook. This is especially true
when one takes a closer look at the oil equipment space in
Strong Oil & Gas Outlook
The ongoing tension in Iran over its nuclear program, supply
disruptions in South Sudan and Syria, along with dwindling supplies
from traditional fields are keeping oil production under
Some respite comes from continued strength in the major emerging
markets like India, China and Brazil along with growth in
developing nations where oil consumption is on the rise. The supply
constraint in the backdrop of growing demand will boost oil prices
higher, particularly in spring and summer.
Since the discovery of new energy reserves is expensive,
unconventional sources of energy such as shale oil, deepwater
drilling and bitumen production have become the new source of fuel
for the world's largest energy consumers. Shale gas production is
booming in the U.S. market with the influx of hydraulic fracturing.
The discovery of shale gas and new drilling technologies are
playing the key roles in the growth of oil and gas equipment
Market Vectors Launches Unconventional Oil and Gas
Additionally, due to how closed-off many American and
Western firms are from emerging market oil fields, a bigger focus
on domestic supplies has begun to take place with special care to
this shale market. This has acted as a huge catalyst for oil and
gas equipment comapneis and it could help to power these firms to
further growth in the months ahead.
Furthermore, although oil prices have been weak, natural gas has
finally started to bounce back suggesting that this market could
begin to attract more attention in the future as well. Given both
the importance of domestic supplies and the more bullish
environment in natural gas, it could be an interesting time to take
a closer look at the oil and gas equipment space as a way to play
growth in the space.
While there are a number of individual securities that target
the sector, an ETF approach may be a lower risk way to target the
often volatile space. For these investors, any of the following
ETFs could be worth a closer look:
Market Vectors Oil Services ETF (
Investors seeking exposure to oil equipment and service may find
Van Eck's OIH an intriguing option for playing the segment. With
AUM of more than a billion dollars, this ETF is the largest and
most widely traded in this category at more than 4.7 million shares
Initiated in December 2011, the fund seeks to match the price
and performance of the Market Vectors US Listed Oil Services 25
Index, before fees and expenses. The product holds 27 oil service
companies in its basket with 72.2% exposure in top 10 holdings. The
top three companies include
National Oilwell Varco Inc.
The fund is highly exposed to the U.S. with 76% of the total,
followed by Europe in countries like Switzerland, Norway, Italy,
United Kingdom, and Netherlands. The fund delivered outstanding
returns of 6.1% in three-month period with an attractive dividend
yield of 4.29% per annum. Additionally, it is the low cost choice
in the energy space with 35 bps in annual fees and a small bid/ask
Play An Oil Bull With These Three Emerging Market
Dow Jones U.S. Oil Equipment & Services Index Fund
The fund, launched by iShares in May 2006, seeks to replicate
the performance of the Dow Jones U.S. Select Oil Equipment &
Services Index. With total assets of $428.1 million, the product
holds 45 stocks of companies that supply oil equipment and services
to oil fields and offshore platforms such as drilling, exploration,
engineering, logistics, seismic information services and platform
The fund allocates 66.3% of the assets in top 10 holdings, which
includes Schlumberger, Halliburton and National Oilwell as top
three firms. While giant and large cap stocks account for nearly
54% of the assets, mid and small cap hold the remaining (Read:
For Europe ETFs, It Is Hard To Beat Switzerland
The product is relatively expensive as the product charges 47
bps in fees per year. Trading in small numbers of 200,000 per day
on average, the fund delivered negative returns of 20.7% over the
last year (ending March 2012). Additionally, it pays a minimal
dividend, representing a small 0.26% yield per annum.
SPDR S&P Oil & Gas Equipment & Services ETF
This fund, issued by State Street in June 2006, seeks to
replicate the performance of S&P Oil & Gas Equipment &
Services Select Industry index. The product only holds $266.2
million of assets and is less liquid than some of the others on the
With total holdings of 43 securities in its basket, the fund is
least concentrated in the top 10 companies with 27% exposure. The
top three holdings include
Core Laboratories NV
Helix Energy Solutions Group Inc.
). The majority of these stocks are U.S. mid and small caps, as
these segments constitute more than 82% of assets in the basket.
(See more ETFs in the
Zacks ETF Center
The product underperformed the market over the past one-year
period (as of March 2012), producing negative returns of 19.5% and
lower annual dividend yield of 0.22%. However, the fund charges a
paltry fee of 35 bps a year and has small bid-ask spread and a low
level of tracking error.
Dynamic Oil & Gas Services Portfolio (
Launched in October 2005, PXJ is designed to provide capital
appreciation or returns of the U.S. oil and gas services stocks.
With total assets of $139.5 million, the fund is a more volatile
and less liquid ETF in the energy space and tracks the Oil &
Gas Services Intellidex Index.
The stocks in the fund are evaluated on good investment merits
such as price momentum, earnings momentum, quality, management
action and value. The ETF uses a full replication strategy, holding
all 30 stocks in the index. (Read:
Oil Bull Market Is No Place For MLP ETF
The product allocates about 46% of its assets in top 10 firms,
Diamond Offshore Drilling Inc.
), Schlumberger and
FMC Technologies Inc.
) as top three companies. This ETF is appropriate for investors
seeking broad exposure to the U.S. oil & gas markets with a
focus on all cap equities.
The product is a high cost choice in the energy space as it
charges 63 bps in fees per year. The fund produced negative annual
returns of 20.9% over the last year (as of March 2012) and yields a
paltry annual dividend of 0.01%.
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(): ETF Research Reports
ISHARS-DJ OIL E (IEZ): ETF Research Reports
MKT VEC-OIL SVC (OIH): ETF Research Reports
PWRSH-DYN OIL&G (PXJ): ETF Research Reports
SPDR-SP O&G EQP (XES): ETF Research Reports
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