FENY: Time for This Top Ranked Energy ETF? - ETF News And Commentary

The U.S. energy sector has been on fire over last year thanks to the booming shale oil and gas production, and soaring demand. America's drive to become energy independent seems closer than ever with increasing domestic production and falling imports.

As per

, the U.S. shale oil boom has enabled the oil and gas companies to considerably enhance their financial position which in turn reinforces the continued momentum in production.  

The article further noted that combined cash earned from operations by 25 foremost North American exploration and production companies is likely to surpass their capital expenditure next year, for the first time in about seven years.

Apart from a few bumps, the road ahead for the U.S. economy appears smooth.  Overall positive U.S. economic data and a likely wrap-up of the QE program this year signals improved U.S. economic activity and higher energy consumption. Notably, the U.S. is the world's biggest oil user. As a result, improved U.S. growth translates well into higher consumption.    

If these points were not enough, geo-political tensions in the oil-rich nations like Iraq and Russia have been an added advantage to the U.S. energy sector. Additionally, America is expected to be “energy independent” by 2035 and start exporting natural gas by the end of this decade (Read:

).

The sector was one of the top performers in Q2 in terms of earnings growth. Also, the sector is expected to log 9.4% and 8% earnings growth in 2014 and 2015, respectively.  Per U.S. Energy Information Administration

, the total U.S. crude oil output averaged an estimated 8.5 million barrels per day (bbl/d) in July, the

monthly production since April 1987. That's not all; the expected 2015 production could be the highest annual average since 1972.

This injected optimism into the energy stocks and consequently the ETFs at the current level. The bullish fundamentals make it important to find a top ranked pick in this segment. In order to do this, investors can look at the Zacks ETF Rank and find the top energy ETF.

The Zacks ETF Rank provides a recommendation for the ETF in the context of our outlook for the underlying industry, sector, style box, or asset class. Our proprietary methodology also takes into account the risk preferences of investors. ETFs are ranked on a scale of 1 (Strong Buy) to 5 (Strong Sell) while these also receive one of three risk ratings, namely Low, Medium or High.

The aim of our models is to select the best ETFs within each risk category. We assign each ETF one of five ranks within each risk bucket. Thus, the Zacks ETF Rank reflects the expected return of an ETF relative to other products with a similar level of risk (see more in the

.

For investors seeking to apply this methodology to their portfolio in the energy sector, we have taken a closer look at the top ranked FENY, which has a Zacks ETF Rank #2 (Buy) with a Medium risk tolerance level. The details are highlighted below (see:

):

This ETF offers exposure to the large cap energy exploration and production stocks of the U.S. equity market, by tracking MSCI USA IMI Energy Index. This is the new addition in the energy space that has accumulated $162 million in its asset base since its debut around 10 months ago.

Holding about 168 stocks in its basket, the fund faces heavy concentration risk. The top three holdings – Exxon Mobil (19.9%), Chevron (11.4%) and Schlumberger NV (6.7%) – comprise less than 40% of the combined assets in the basket. The product puts nearly 60% in the top 10 holdings (read:

).

From an industry perspective, Oil & Gas Integrated has taken the top spot in the fund representing about 37% of the total assets, closely followed by Energy Exploration & Production and Energy Equipment & Services with 28% and 18% share, respectively.

The product is also a cost-effective option in the energy equities ETF space charging only 12 bps a year which is far below the category average. Also, the fund trades at a decent volume of 100,000 shares a day leading to a low bid-ask spread ratio.

Style wise, though the fund has about 60% exposure in value stocks, it has a growth tilt too which enables investors to ride on the present U.S. growth momentum. Blend stocks account for less than one-fourth of the portfolio. On the other hand, lesser volatility and risks can also be confirmed by the fund's almost entire focus on large-cap value stocks.

FENY has gained about 11% so far this year (as of August 26, 2014). The ETF has returned on par with the big energy ETFs such as

,

and

. Further, the ETF yields a dividend of 1.00% annually (as of August 26, 2014) making it an interesting pick for energy-focused investors.

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