Big Oil Dominates ETFs That Focus On Energy

Big Oil Dominates ETFs That Focus On Energy

Energy is perhaps the most basic input to any economy. Each of us burns some form of fuel 24 hours a day, seven days a week. Demand is relentless. How much that demand grows depends on the economy.

Exchange traded funds offer an easy way to cast a wide investment net in various groups of energy stocks. You pretty much have to believe that oil and gas prices are headed higher to plow into these funds. Steep declines in those commodities likely would mean fierce head winds for the fuel industry.

The energy sector has enjoyed boom times in the last few years. Almost every part of the oil and gas business has seen bigger volumes and profit margins: exploring, drilling, pipelines, refining, shipping. It’s no wonder that ETFs such as iShares Dow Jones U.S. Energy, which tracks the Dow Jones U.S. Oil & Gas Index, have thrived.

The iShares energy ETF tracks huge, integrated oil and gas stocks.

Big Oil

The ETF’s two biggest holdings, mega-caps Exxon Mobil and Chevron , account for 41% of the ETF’s assets.

They’re perfect examples of integrated oil companies, active in finding and extracting oil and gas deposits worldwide. You probably filled up at one of their gas stations over the weekend. They handled most of the steps in between.

The fund’s results reflect the world’s surging appetite for fuel. It has climbed 23.8% year to date, according to Morningstar. That’s on top of 34% last year, 32% in ’04 and 27% in ’03.

If you like this sector but prefer a less concentrated strategy, Vanguard Energy ETF has the same top five holdings as the iShares, but has only 30% of its assets poured into its top two. This ETF was launched in September 2004 and has gained 23% year to date.

Exploring For A Winner

If you want to focus on exploration and drilling, you might look at iShares Dow Jones U.S. Oil & Gas Exploration Index . But that ETF was launched just seven months ago and is about flat.

While supply and demand determine the price for any free-market item, oil prices are especially sensitive to changes in the balance.

On the demand side, the oil market gauges the outlooks for world economies, especially the U.S., China, India and Western Europe. If those economies keep growing at recent rates, oil producers will be hard-pressed to keep up.

Oil supply is far more complex. Soaring prices have indicated that supplies are scarce. But they’re not. U.S. crude stocks are way above their average for this time of year.
OPEC recently cut its stated output, as crude plunged about 25% from a mid-July peak. OPEC President Edmund Daukoru is seeking another reduction at the cartel’s Dec. 14 meeting.

Copyright 2006 Investor’s Business Daily, Inc.

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