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Bet on an Energy Sector Rebound With These ETFs (FILL, IEO, PXE)

June 19, 2012 5:14 pm
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Recently, oil futures and oil-related equities have been in a malaise. Over the past three months, the U.S. Oil Fund (NYSE: USO) is off 23.2 percent and the iShares Dow Jones US Oil Equipment Index Fund (NYSE: IEZ) is lower by 18.3 percent. Meanwhile, the Energy Select Sector SPDR (NYSE: XLE) looks good by comparison with a loss of just 12.1 percent.

Consequently, investors looking to bet on a rebound in the energy sector need to be ultra-selective about where they lay those bets. IEZ and XLE’s declines indicate that it is not safe to just throw money at the largest, most recognizable names in the oil patch and hope for the best. If anything, recent returns show that strategy is a recipe for disaster.

Patient investors looking to do some dip-buying in the energy sector should consider ETFs beyond the usual suspects. Here are some ETFs worthy a spots on investors’ watch lists.

PowerShares Energy Exploration & Production Portfolio (NYSE: PXE)
The PowerShares Energy Exploration & Production Portfolio has a higher annual expense ratio than XLE and the Vanguard Energy ETF (NYSE: VDE), but PXE is worth paying up for. The PowerShares offering has consistently outperformed its larger rivals.

What is noteworthy about PXE is not just that it outperforms XLE and VDE, but how it accomplishes the feat. PXE is not excessively weighted to either Exxon Mobil (NYSE: XOM) or Chevron (NYSE: CVX) and offers more exposure to mid- and small-cap energy names.

First Trust ISE-Revere Natural Gas Index Fund (NYSE: FCG)
Natural gas futures have shown some signs of life recently, but the commodity is also showing an uptick in volatility. In the past five trading days, the U.S. Natural Gas Fund (NYSE: UNG) is up almost 15 percent, but this fund is not for the faint of heart. On Tuesday, UNG closed the session down over 3.4%.

Investors looking for a more docile way to play resurgent natural gas prices should consider the First Trust ISE-Revere Natural Gas Index Fund. As an equity-based fund, FCG is typically less volatile than UNG, but its holdings should benefit from increased natural gas demand, higher prices and lower production.

iShares Dow Jones U.S. Oil & Gas Exploration & Production Index Fund (NYSE: IEO)
With more than $285 million in assets under management, the iShares Dow Jones U.S. Oil & Gas Exploration & Production Index Fund is by no means small, nor is it anonymous. Still, size does not tell the real story of IEO’s utility.

Not only is the ETF an ideal way to get equity exposure to various U.S. shale plays, the fund is also a credible avenue for tapping into Canada’s oil sands region.

The downside of IEO is that it frequently lags XLE in terms of performance, but that situation is the result of IEO being home to stocks such as Apache (NYSE: APA) and Anadarko Petroleum (NYSE: APC) that are more intimately correlated to the price of oil than the likes of Exxon or Chevron. Ultimately, IEO is a double-edged sword when it comes to oil prices. Stay away from this ETF when oil futures are faltering. Embrace it when oil is surging.

iShares MSCI Global Energy Producers Fund (NYSE: FILL)
The newly minted iShares MSCI Global Energy Producers Fund arguably has the most conservative constituency of the funds featured on this list. The ETF is heavy on U.S. and European integrated names such as Exxon, Chevron, Royal Dutch Shell (NYSE: RDS-A) and BP (NYSE: BP).

There are two knocks on FILL. First, active traders probably will not like the fact that the ETF’s average daily volume is barely above 6,300 shares. Second, integrated oil stocks have a tendency to lag rising oil prices because those high prices can crimp refining margins.

On the bright side, FILL’s price/earnings and price/book ratios are lower than those offered by the iShares S&P Global Energy Sector Index Fund (NYSE: IXC) and the iShares Dow Jones U.S. Energy Sector Index Fund (NYSE: IYE), according to iShares data.

For more on energy ETFs, click here.

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