ETF Showdown: Not Now, Maybe Later
It's widely known that energy stocks aren't the place to be these. Even the blue chips are getting hammered, a fact highlighted by a decline of almost 6% in the past month for the Energy Select SPDR (NYSE: XLE).
Makes sense. West Texas Intermediate oil futures are down about 15% since the start of May and Brent crude, the global benchmark, is deep in the red as well. Likewise, it's no surprise the combination of emerging markets and oil has proven toxic at best. Just look the iShares MSCI Brazil Index Fund (NYSE: EWZ) and the Market Vectors Russia ETF (NYSE: RSX). Those funds are down 16.4% and 17.6% in the past month, respectively.
Obviously emerging markets and clearly levered to the oil trade, EWZ and RSX have been savagely beaten as commodities and emerging markets fare have been rejected. On that note, one can only imagine how ugly things could be of an ETF that is a combination energy sector/emerging markets fund.
Two such funds exist, the EGShares Energy GEMS ETF (NYSE: OGEM) and its newer rival, the iShares MSCI Emerging Markets Energy Sector Capped Index Fund (NYSE: EMEY). So we have ourselves the making of what could be an ugly "ETF Showdown," but one that's packed with potential as well.
The iShares MSCI Emerging Markets Energy Sector Capped Index Fund came to market in February as a direct competitor to OGEM, which celebrated its third-birthday earlier this week. OGEM, home to 30 stocks and an 0.85% annual expense ratio, has $11.2 million in assets under management. EMEY has 49 stocks and $7.8 million in AUM while charging 0.69%.
Neither fund is particularly liquid, though OGEM's average daily volume of almost 3,550 shares easily trounces EMEY's ADV, which isn't even in the triple-digits.
Both OGEM and EMEY are having on the usual suspects of emerging markets energy firms, meaning Russia's Gazprom, Brazil's Petrobras (NYSE: PBR) and Chinese oil giants PetroChina (NYSE: PTR) and Cnooc (NYSE: CEO) figure prominently in both funds.
At the country level, Russia, the world's largest non-OPEC oil producer, accounts for almost 35% of OGEM's weight. China and Brazil combine for another 25%. Within EMEY, that trio represents two-thirds of the funds country allocation.
As has been previously noted, exposure to Petrobras isn't a good things these days. Brazil's state-owned oil company has been the worst-performing major oil stock in the world for over two years and currently resides below $20. To that end, we don't like OGEM's 7.1% to problematic Petrobras, but more concerning is the iShares fund's 14.5% allocation to two different Petrobras securities.
Another point in OGEM's favor is a larger weight to Colombia's Ecopetrol (NYSE: EC), arguably the antithesis of Petrobras when it comes to state-run oil companies. Ecopetrol is the ninth-largest holding in both ETFs, but its weight in OGEM is 4.36% compared to 3.24% in EMEY.
Regarding performance, well, it's about as ugly as one would expect. Since EMEY came to market in February, the fund has tumbled 22%, but OGEM is down more than 21% over the same time. In the past month, OGEM is off 14.3% compared to 12.4% for EMEY.
The cold, harsh reality is that the current market environment is neither conducive to owning oil stocks nor owning emerging markets equities and ETFs so this isn't the time to put either OGEM or EMEY in a portfolio. That time will come again and when it does, our preference would be for OGEM on the basis of its lower exposure to Petrobras and Brazil and its superior liquidity.
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