New Small-Cap Oil ETF

By Matthew McCall | May 13, 2011 AAA

There are a plethora of ETFs that target energy stocks already available for investors. However, Index IQ Funds has decided to offer a new approach to investing in the energy sector.

TUTORIAL: Exchange-Traded Funds: Introduction

The IQ Global Oil Small Cap ETF (NYSE:IOIL) tracks an index that invests in global small cap companies engaged in primarily in exploration, production, refining, marketing, drilling and services in the oil industry. This could be a welcomed change for investor looking to diversify their exposure to the energy sector.

The ETF is composed of 61 stocks with an average market capitalization of $3.06 billion and an expense ratio of 0.75%. One concern is that the average market cap and many of the top holdings are not considered small cap stocks because of their size. Typically, a small cap stock would have a value of $2 billion or less; so you can see what they call in the industry "style drift."

Top Holdings
The top three holdings of the ETF are based in the United States, and each company offers a different angle to investing in the oil sector. Sunoco (NYSE:SUN) is a major refiner of petroleum products and a retailer of gasoline through a network of over 4,700 retail stations in the United States.

The company trades with a forward P/E ratio of about 15 and a price-to-sales of only 0.13. It also pays an annual dividend of 1.4%. Technically, the $4.8 billion company is hitting a new four-month low as the price of oil continues to fall.(ETFs are a viable alternative to mutual funds, but before you invest, there are a few things you should know. For more, see Using ETFs To Build A Cost-Effective Portfolio.)

Oceaneering Intl (NYSE:OII) is an energy equipment and services firm that provides its services primarily to the offshore and deepwater drilling platforms. The forward P/E ratio is 16.5 and price-to-sales come in at 2.2. The stock does not pay a dividend, however the chart is more attractive than SUN, as it continues to hold support at $75.

Core Laboratories (NYSE:CLB) is an interesting play on the energy sector. The company provides energy firms with a proprietary reservoir description that helps maximize hydrocarbon recovery from existing oil and natural gas fields. The stock is a little more expensive with a forward P/E ratio of about 20.3 and price-to-sales at 5.3. The dividend yield is 1.5%. Technically, the stock is holding support at the $90 area after touching an all-time high in early April. Buying near $90 is not a bad idea with a narrow stop-loss. (For more, see How To Use The P/E Ratio And PEG To Tell A Stock's Future.)

Individual Stocks or ETF
The big question is whether it is worth paying the 0.75% annual expense ratio to buy into IOIL or go out and pick a stock or two in the sector and skip the fees. It truly depends on the investor; however, you might lean towards the ETF in this situation because it offers instant diversification among the many subsectors within the energy arena. It also removes any company-specific risk that may arise with buying only a couple individual stocks. Either way, pick an entry price after a week or two of selling in the oil sector and always place a stop-loss. (If you are trying to choose between these two index-tracking investments, compare the costs. For more, see ETFs Vs Index Funds: Quantifying The Difference.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

comments powered by Disqus
Related Analysis
  1. India Remains An Emerging Market Bright Spot
    Stock Analysis

    India Remains An Emerging Market Bright Spot

  2. Still More Gains Ahead For Semiconductor Makers
    Stock Analysis

    Still More Gains Ahead For Semiconductor Makers

  3. Unconventional Drilling Still Has Room To Boom
    Stock Analysis

    Unconventional Drilling Still Has Room To Boom

  4. Finding An Alternative With Currency ETFs
    Stock Analysis

    Finding An Alternative With Currency ETFs

  5. Commodities: Has Their Time Come Again?
    Stock Analysis

    Commodities: Has Their Time Come Again?

Trading Center