Top Performing Energy ETFs (XES, IEZ, GEOS, SLB, HAL)
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: USO) 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: XES)
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.
The top holding is a Geospace Technologies (NASDAQ: GEOS), 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 percent.
iShares Dow Jones U.S. Oil Equipment & Services Index ETF (NYSE: IEZ)
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: SLB) 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: HAL) 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 0.51 percent.
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.
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