The battered oil and gas sector ran riot on Monday, with the sector’s popular benchmark Energy Select Sector Fund (XLE) jumping nearly 15%.
The catalyst was news that Pfizer and BioNTech may have hit the jackpot with a Covid-19 vaccine–a development that has injected a heavy dose of optimism into global financial markets.
The pharmaceutical giants announced they have developed BNT162, an mRNA vaccine that has been more than 90% effective in preventing Covid-19 infection in nearly 44,000 test subjects.
DataTrek Research co-founder Nick Colas has told CNBC’s “ETF Edge” that energy and banking ETFs could see record inflows in December as mutual funds rotate out of other less favored sectors.
For instance, the S&P Oil & Gas Exploration & Production ETF (XOP) has gained 16.2% since Monday, compared to a 0.35% decline by the Consumer Discretionary Select Sector Fund (XLY).
The ETF space has been enjoying a banner year, with inflows remaining on track to surpass the previous record of $476 billion set three years ago.
YTD Returns: -43.2% With more than $10 billion in AUM, Energy Select Sector SPDR ETF (NYSEARCA:XLE) is the largest dedicated energy fund. Not surprisingly, it’s also the most liquid and boasts a low expense ratio of just 0.13%, making it one of the cheapest oil ETFs to own.
XLE is designed to track the price and yield performance of companies in the Energy Select Sector Index. The index is therefore able to provide investors with broad exposure to companies in the oil, gas, and energy equipment industries. One of its big shortcomings, however , is that XLE contains just 28 stocks in its portfolio, with Chevron Corp. (NYSE:CVX) and ExxonMobil (NYSE:XOM) over-represented with weightings of 23.76% and 22.76%, respectively.
Vanguard funds are popular for being cheap, and the Vanguard Energy ETF (NYSEARCA:VDE) has remained true to this ethos with an expense ratio of just 0.10%. It’s also better diversified than XLE with 118 stocks in its portfolio-albeit with less AUM . Chevron and Exxon are still overrepresented, though, with weightings of 20.93% and 21.93%, respectively.
VDE tracks the performance of the MSCI US Investable Market Index (IMI)/Energy 25/50, an index consisting of stocks of large- and mid-cap US energy companies. VDE currently trades at $45.97 per unit.
SPDR S&P Oil & Gas Exploration & Production ETF (XOP) is a great ETF for investors who are not content settling for a vanilla fund that targets the obvious energy candidates. The ETF invests in 44 energy exploration and production companies and is pretty well-diversified : Its top holding EQT Corp. (NYSE:EQT) commands a weighing of just 4.23%.
That said, diversification is not necessarily what it’s cracked up to be. XOP’s high exposure to smaller energy companies can lead to extra-high volatility when the oil markets get choppy. One unit of XOP is currently changing hands at $48.64.
VanEck Vectors Oil Services ETF (NYSEARCA:OIH) is an energy fund that provides a different take on the Oil Patch by investing in stocks of oilfield service companies such as Schlumberger (NYSE:SLB), Halliburton Co. (NYSE:HAL) and Baker Hughes (NYSE:BKR) instead of integrated energy companies like Chevron and Exxon.
OIH has a total of 26 oil services company stocks and generally enjoys strong liquidity. OIH is trading at $119.49-a-pop.
The iShares MSCI Global Energy Producers ETF (FILL) reflects the reality that the energy universe extends far beyond the borders of the United States. FILL’s biggest holdings are–no surprises here–Exxon and Chevron, but also includes a healthy sprinkling of leading international E&P players such as Total (NYSE:TOT), BP Plc. (NYSE:BP), Royal Dutch Shell (NYSE:RDS.A), and Lukoil (MCX:LKOH). FILL is heavily diversified, boasting a total of 197 stocks in its portfolio.
A major drawback, however, is that FILL is a small fund with less than $30M in AUM and is also thinly-traded. The ETF is trading at $11.95/unit.
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