The price of light sweet crude has been falling for two months
after topping out in early September.
The conflict in Syria and tensions in the Middle East were
heightened in September and the price of oil reflected the
seriousness of the situation. Since that time Syria has been
removed from the headlines and most recently Iran has been open
to nuclear negotiations.
The price of oil has fallen from $108/barrel to as low as $93
last week. During this time the United States Oil Fund (NYSE:
) pulled back 15 percent from the yearly high. A subset of energy
ETFs that have been able to avoid the selling focus on the
equipment and service stocks.
SPDR S&P Oil & Gas Equipment & Services ETF (NYSE:
The ETF is trading at the best level since July 2008 and is up
31 percent this year. The basket of 49 stocks is a mixture of
equipment & service companies as well as drilling stocks. A
benefit of this ETF is that it offers investors a true
diversification within the sector as the top holding only makes
up 2.9 percent of the portfolio.
ETF Outlook for the Week of November 11
The top holding is a Geospace Technologies (NASDAQ:
), is a small cap stock that has not had a great year but has
rallied the last few months as the price of oil has fallen. The
top ten holdings only make up 26 percent of the ETF, highlighting
the diversification of the ETF. The annual expense ratio is 0.35
percent and the fund has a small dividend yield of 0.71
iShares Dow Jones U.S. Oil Equipment & Services Index ETF
Sitting at the best level since July 2011 is IEZ, which is
slightly beating XES this year with a gain of 33 percent. While
the two ETFs appear to be interchangeable, they are far from it.
The top two holdings in IEZ make up 32 percent of the ETF with
Schlumberger Ltd (NYSE:
) making up 21 percent of the allocation.
A 36 percent gain for SLB and a 60 percent gain for the second
largest holding, Halliburton (NYSE:
) have paced IEZ in 2013. The problem with having one-third of an
ETF in two stocks is that it will live and die by the performance
of the two stocks versus the entire sector. The lack of
diversification is an issue investors need to be aware of. The
annual expense ratio is 0.45 percent and it pays a dividend of
If the price of oil turns around after the two-month sell-off
it should only boost the performance of both XES and IEZ. Higher
oil prices will result in larger bottom lines for the oil and gas
producers and created a higher demand for equipment and services.
An increased global demand for oil and gas will also be a
catalyst for the continued outperformance of the two ETFs.
When it comes down to deciding which ETF of the two is best
for a portfolio the number one factor should be the top holdings.
If an investor is not comfortable with having one-third of the
portfolio in two stocks, then the clear choice is XES. Over time
being diversified will lower risk and give an investor a better
entry into the entire sector.
(c) 2013 Benzinga.com. Benzinga does not provide investment
advice. All rights reserved.
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