Energy ETFs Share An Old Dilemma With Stocks

Todd Shriber
Printer Friendly Version

Exchange traded funds (ETFs) while still fairly new on the financial scene have developed an interesting quagmire that traders and investors have seen for years: Too many products, too little time, at least as far as the media and the analyst communities are concerned. This is a situation that has been repeated over and over again in myriad sectors for decades.

What I am saying is that traditional media outlets are confined by time and space, so the bulk of their coverage goes the companies with the biggest names and market caps. There is not a sector where this scenario has not been played out in recent years and it has occurred recently in the energy patch, more specifically among oil-related ETFs.

Indulge me for a minute as I briefly tell you ETFs are a private passion of mine. In a former life, I traded at a hedge fund where I fell in love with ETFs during the financial crisis. I was the only trader there that frequently traded ETFs. In fact, in the fourth quarter of 2008, I traded an average of 250,000 shares per day using nothing but ETFs in every single trading day.

When it comes to analyst and media coverage of oil companies, there is something to be said for the biggest players getting the most attention. Travel too far down the food chain in the energy space and one finds more than a few companies that make audacious claims about sitting on ''billions of barrels of oil'' in location or another. We have all seen those emails. Many of these are speculative stocks that probably are not worth the 20 cents they trade for.

So when it comes to ETFs, the funds that hold the Chevrons (CVX) and Exxons (XOM) of the world get the most fanfare. Heck, finding an ETF that is heavily weighted to Apache is a more trying task than many investors might think it is. Obviously, I am referring to ETFs such as the Energy Select Sector SPDR (XLE) and the Oil Services HOLDRs (OIH), just to name a couple. Both find funds in their own right. Average the two together and you would have a positive return of 31% in the past year. Not too shabby at all.

Not surprisingly, the charts of OIH, XLE and several highly liquid big oil ETFs look the same. In fact, they look a lot like the chart below.

SmallCap Oil ETF Chart

The chart illustrates the impressive performance of the PowerShares S&P SmallCap Energy ETF (PSCE). I will save you some time and say do not bother with the math. This ETF leaves OIH and XLE in the dust in the past year. Name another Chevron- or Exxon-heavy ETF and the result is the same. Another oil services ETF or an ETF with a bunch of companies like Apache (APA)? Still the same. And I am talking about wide gaps in performance, 20%-30% in most instances.

Yes, I am dispensing some advice here, but it should NOT be construed as a ''buy'' recommendation on PSCE. The point is there is more to the world of energy ETFs than just the usual suspects and among the unusual suspects, PSCE obviously included, there are superior alternatives.