The bevy of niche ETFs continues to grow, with one that has really caught my attention. The Market Vectors Unconventional Oil & Gas ETF (ARCA:FRAK) tracks an index that invests in the "unconventional" oil and gas segment. This includes coalbed methane, coal seam gas, shale oil, shale gas, tight natural gas, tight oil and tight sands. It basically includes everything but the old ways of drilling for oil and gas. (For additional reading, check out A Guide To Investing In Oil Markets.)
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The ETF began trading on Feb. 12, 2012, and charges a net expense ratio of 0.54% for the basket of 44 stocks. The majority of the stocks are located in the U.S. (71%), with the other 29% in Canada. The ETF leans heavily on large-cap stocks with 84% of the allocation in the asset class. This may be one of the few unattractive factors regarding the ETF. By underweighting the small and mid-cap stocks, it eliminates exposure to some of the pure play unconventional energy stocks.

As the major oil suppliers around the world continue to be positioned in regions that are prone to geopolitical issues, it has been a focus in the U.S. to keep energy production on our soil. Iran has been the latest to cause supplies issues by stopping the shipment of oil to Europe.

Top Holdings
When analyzing the new ETF, it is imperative to look at the top holdings to define the true focus of the fund. The top five stocks make up 35% of the entire ETF, with a heavy focus on the large cap asset class.

The number one holding is Occidental Petroleum (NYSE:OXY), a major integrated oil and gas company that is broken into three segments: oil and gas, chemical and marketing. The stock has held up well and is only approximately 10% from its all-time high set last May. Fundamentally, OXY is attractive with a PEG ratio of 0.90 and a dividend yield of 2.1%.

The second largest holding is an energy firm based in Canada, Canadian Natural Resources Limited (NYSE:CNQ). The company has operations in North America and offshore in the UK and West Africa. The stock has not performed as well as many of its peers recently, but it does have exposure to the Canadian oilsands, which could pay off down the road. The PEG ratio remains attractive at 1.1 and the dividend yield is a minimal 0.9%.

Rounding out the top three is EOG Resources (NYSE:EOG), another independent oil and gas company that has operations in several continents. A recent rally in the stock has it near a four-year high, however it is overbought at this time if you are considering buying. Fundamentally, the stock is undervalued with a PEG ratio of 0.32 and a dividend yield of 0.6%. A pullback to the $105 area looks like the buy zone.

The Bottom Line
As much as I want to love the idea behind FRAK, I am not yet convinced it is the best way to play the unconventional oil and gas sector. My view is that it should include additional smaller companies to get the concentration needed to make it truly unconventional. That being said, the basket of stocks in the ETF is solid and it is a nice way to play the rising energy sector. (For additional reading, check out 5 Must-Have Metrics For Value Investors.)

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At the time of writing, Matthew McCall did not own shares in any of the companies mentioned in this article.

Tickers in this Article: FRAK, OXY, CNQ, EOG

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