Fracking ETFs Or Drilling Services Stocks?

By Jesse Emspak AAA

Hydraulic fracturing — otherwise known as fracking — gets a lot of attention for its environmental effects and opening up new (and profitable) oil and gas fields. The question for many investors is how to get in on fracking. One method is with an exchange-traded fund (ETF).

There's only one ETF that covers fracking specifically, the Market Vectors Unconventional Oil & Gas (FRAK). It's a relatively small ETF, though, with a market capitalization of about $98 million spread across 3 million shares. The ETF was started in February 2012, and since then has gained over 26% as of the end of August 2014, reaching about $32. (For related reading, see: FRAK: Historical Analysis & Opinions.)

Top Holdings

The top-five holdings are Anadarko Petroleum Corp. (APC), Occidental Petroleum Corp. (OXY), EOG Resources Inc. (EOG), Hess Corp. (HES), and Devon Energy Corp. (DVN), making up from 8.3% of the fund (Anadarko) to 5.1% (Devon). Devon, Hess, and EOG have been the best performers over the past 12 months. Devon hit a 30% return for the past year, Hess 33%, and EOG 39%. By comparison the ETF's own one-year return looks less impressive at 20%, but that is still a pretty good run for any investment.

That said, fracking is just a technique, used by many companies as they drill for gas and oil. So there really isn't any such thing as a "fracking" company, except some small operators that perform that service specifically for larger outfits. That tends to fall under oil services. (For more, see: Unconventional Drilling Still Has Room To Boom.)

Focus On Well Services

With that in mind, it's worth comparing FRAK to other ETFs in the oil services field. Market Vectors happens to have just that: Market Vectors Oil Services ETF (OIH). Others are the iShares Dow Jones Oil Equipment & Services Index Fund (IEZ), PowerShares Dynamic Oil and Gas Services (PXJ) and SPDR S&P Oil & Gas Equipment & Services (XES). Returns on these ETFs are all between 14% (XES) and 22% (IEZ), which is a few points better than FRAK's.

There's a lot of overlap in the top holdings in this group of ETFs. Schlumberger Ltd. (SLB), for instance, is the biggest piece of OIH and IEZ, the fourth largest in PXJ, and the seventh-largest component of XES. Halliburton Co. (HAL) shows up in the top ten as well. Generally the biggest holdings are in larger firms than FRAK, and that might be partly a function of bigger asset levels. The smallest of these oil services ETFs is PXJ, with $114 million in assets. OIH, meanwhile, weighs in at $1.4 billion. (For more, see: Why Schlumberger Is A Name You Should Know.)

Either way, it isn't necessary to be wedded to the idea of fracking as a category to get the same returns as the rest of the energy sector, and there's little evidence that doing so gets markedly better performance for the investment dollar.

That doesn't mean the situation can't change. One reason investors are interested in fracking to begin with is that there is a lot of growth potential in domestic (or rather, U.S. and Canadian) natural gas and oil fields. The United States is already a major oil and gas producer (and consumer), and the demand will likely keep rising.

The Bottom Line

You can put money into fracking directly, but the difference between that and a garden variety oil services ETF is — so far — not that large, and it might be better to look at the underlying assets and company strategies if one is interested in fracking plays. (For related reading, see: Fracking Can't Happen Without These Companies.)

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