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."
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.)
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