Energy ETFs: Take your pick

Investors looking for exposure to the energy sector as earnings heat up can choose from a variety of exchange-traded funds.

By TheStreet Staff Apr 26, 2011 11:18AM

Oil pump jack, low angle view, dusk © Seth Joel/PhotographerBy Don Dion, TheStreet


Hundreds of companies will report their earnings this quarter, allowing investors to get a feel for the state of industries ranging from tech to health care.


Energy, in particular, will be placed under the microscope this week as Exxon Mobil (XOM), Chevron (CVX) and ConocoPhillips (COP) release their reports.


Already, analysts are forecasting that rising oil prices will fuel strong earnings in this sector. As the Wall Street Journal points out, two factors are lending to crude's dramatic ascension: unrest in the Arab world and the global economic recovery.


ConocoPhillips will officially kick things off on Wednesday. In the meantime, investors can prepare themselves for this week of excitement by arming themselves with ETFs.

The iShares Dow Jones U.S. Energy Sector Index Fund (IYE) is one fund investors may want to consider when looking to track this energy-heavy earnings week. This fund is designed to provide investors with a snapshot of the broad oil and gas industry. Therefore, it is not surprising that the fund lists Exxon, Chevron and ConocoPhillips among its top holdings. Together, these three account for over 40% of the fund's total index.


IYE's dedication to the energy majors makes it attractive as a short-term play on this week's earnings calendar. However, when it comes to tracking the energy industry over the long term, I urge investors to look elsewhere. With close to half of the fund's index dedicated to three positions, the fund will be vulnerable to security-specific risks.


With 35% of its index spread across these three companies, the Energy Select Sector SPDR's (XLE) index is slightly less top-heavy than IYE. However, once again, this fund is best utilized as a short-term play on this week's busy earnings calendar.


A fund such as the SPDR S&P Oil & Gas Exploration & Production ETF (XOP) is a considerably more stable option for investors looking to track energy over the long run. Exxon, Chevron, and ConocoPhillips can be found listed among the fund's index but they represent less than 5% of its assets.


Outside of these energy majors, XOP exposes investors to names such as PetroHawk Energy (HK), Cabot Oil & Gas (COG), Sandridge Energy (SD) and Frontier Oil (FTO).


Unlike IYE and XLE, XOP will not be steered by the action witnessed from individual companies since no one position comprises more than 2% of its index. XOP's performance will be determined by general strength across the energy industry.


In 2011, taking a diversified approach to tracking the energy markets has paid off. Since breaking away from the pack in mid-March, XOP has maintained a comfortable lead over its top heavy competitors.

Although earnings season will thrust energy into the spotlight over the next few days, beyond this week, expect oil, natural gas and other components of this industry to remain on the collective minds of the investing public.


Using ETFs, well-educated investors can construct a portfolio that satisfies all types of investing strategies and time horizons. Be sure to do your homework before diving into any of these funds.


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