New York, May 3rd (TradersHuddle.com) - Analyze enough equity-based oil ETFs and one quickly comes to the conclusion that Exxon Mobil (NYSE: XOM), Chevron (NYSE: CVX) and just a couple of other oil industry behemoths dominate most of these funds. For conservative investors that just cannot make up their minds about what integrated oil stock to own, the fact that an ETF such as the Energy Select Sector SPDR (NYSE: XLE) devotes about a third of its weight to Exxon and Chevron is a good thing.

The other side of the coin is oil ETFs are just like scores of other sector funds: The more risk an investor is willing to take on, the higher the potential rewards. That's exactly why the SPDR S&P Oil & Gas Exploration & Production ETF (NYSE: XOP) merits consideration.

Oil stocks and the ETFs they call home are by nature "high beta." XLE's beta is 1.05, but XOP blows that away with a beta of 1.24, meaning XOP is far more sensitive to the broader market's whims than XLE. In reality, the XOP/XLE comparison isn't an apples-to-apples match up. While a sizable chunk of XLE's weight is tied up in just two mega-cap stocks, XOP is essentially an equal-weight product. Home to 75 stocks, XOP allocates no more than 1.9% to any single name.

A near equal-weight composition is just one alluring element to XOP. Another is what stocks are featured in the ETF's lineup. Many, perhaps too many, oil ETFs focus exclusively on large and mega-cap names. Indeed, Chevron and Occidental Petroleum (NYSE: OXY) call XOP, but their weights are not significant enough to overpower the ETF at large. Overall, integrated names represent just 7.2% of XOP's weight.

Refining plays garner an allocation of 13.5%. Where we're going with this is to say XOP is really about independent oil and gas producers, otherwise known as the true growth companies of the energy sector. The weighted average market cap of XOP holdings is less than $17.6 billion compared to a whopping $131.6 billion for XLE.

In other words, XOP's constituency is more nimble. These companies can take more chances with high risk/high reward projects and the earnings growth they can offer far outpaces their stodgier peers. That higher EPS growth translates into better returns to shareholders and the still reasonable market values make many mid-cap and smaller big-cap oil and gas names valid takeover targets.

Yes, that is another reason to consider XOP. Of its 75 holdings, it not a stretch to say 10 or 12 or credible acquisition targets. For now, have a look at XOP's chart. Get long if the ETF bounces off support at $52. Head for the hills if oil prices fall dramatically because XOP could head back to the mid-$40s in that scenario.

Related Articles
  1. Mutual Funds & ETFs

    Comparing ETFs Vs. Mutual Funds For Tax Efficiency

    Explore a comparison of mutual funds and exchange-traded funds, or ETFs, and learn what makes ETFs a significantly more tax-efficient investment.
  2. Mutual Funds & ETFs

    ETF Analysis: Vanguard Small-Cap Value

    Find out about the Vanguard Small-Cap Value ETF, and explore detailed analysis of its characteristics, suitability, recommendations and historical statistics.
  3. Mutual Funds & ETFs

    ETF Analysis: Vanguard Intermediate-Term Corp Bd

    Learn about the Vanguard Intermediate-Term Corporate Bond ETF, and explore detailed analysis of the fund's characteristics, risks and historical statistics.
  4. Insurance

    Whole or Term Life Insurance: Which Is Better?

    Learn the difference between term life insurance and whole life insurance. Understand when it is beneficial to buy each type of life insurance.
  5. Mutual Funds & ETFs

    ETF Analysis: iShares 10-20 Year Treasury Bond

    Learn about the iShares 1-20 Year Treasury Bond ETF and its holdings, and understand why investors may be better served to look at other bond funds.
  6. Mutual Funds & ETFs

    ETF Analysis: iShares Global Telecom

    Learn about the iShares Global Telecom exchange-traded fund, which invests in U.S. and foreign telecommunication companies with high dividend yields.
  7. Chart Advisor

    Gold Struggles to Climb Higher and May Fall Soon

    Traders will be watching the price of gold over the coming weeks. We'll take a look at how a couple major moving averages are suggesting that the next move could be lower.
  8. Mutual Funds & ETFs

    ETF Analysis: United States Brent Oil Fund

    Learn more about the United States Brent Oil exchange-traded fund, the characteristics of the fund and the suitability and recommendations of it.
  9. Mutual Funds & ETFs

    ETF Analysis: ProShares Ultra Bloomberg Crude Oil

    Find out more about the ProShares Ultra Bloomberg Crude Oil ETF, the characteristics of UCO and the suitability and recommendations of UCO for investors.
  10. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI Hong Kong

    Learn about the iShares MSCI Hong Kong fund, which invests in various equities of companies listed on the Hong Kong Stock Exchange.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Exchange-Traded Fund (ETF)

    A security that tracks an index, a commodity or a basket of assets ...
  3. Exchange-Traded Mutual Funds (ETMF)

    Investopedia explains the definition of exchange-traded mutual ...
  4. Fractal Markets Hypothesis (FMH)

    An alternative investment theory to Efficient Market Hypothesis ...
  5. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  6. Sucker Yield

    When an investor has essentially risked all of his capital for ...
RELATED FAQS
  1. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  2. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  3. What does a high turnover ratio signify for an investment fund?

    If an investment fund has a high turnover ratio, it indicates it replaces most or all of its holdings over a one-year period. ... Read Full Answer >>
  4. Does index trading increase market vulnerability?

    The rise of index trading may increase the overall vulnerability of the stock market due to increased correlations between ... Read Full Answer >>
  5. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  6. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!