The energy sector once again has become a popular segment, as surging oil prices and a continued increase in U.S. oil production have put the space into focus. Since the start of the second half of the year, oil is moving higher on improving global economic growth conditions and tight supply in key producing areas around the globe.
The ongoing tension in Syria and the resulting threat of supply disruption in the Middle East is also pushing oil prices higher (read: Oil ETFs Jump on Syria Turmoil), leading to a sudden jump in many oil producing stocks.
Recent Trends: Oil Demand & Supply
Demand for oil in the U.S. is also rising rapidly this year, adding to the commodity strength. In fact, the data from the International Energy Agency (IEA) shows that the demand has increased in four of the first six months of 2013, marking the strongest run in more than two years.
Oil production in the U.S, the largest oil consumer, soared to levels not seen in decades. According to the Energy Information Administration (EIA), U.S. crude oil production would jump 14% this year and 22% in the next (read: Oil ETFs Surge on Strong Data).
With this upward trend expected to continue, the U.S. is expected to surpass both Russia and Saudi Arabia and become the world’s biggest producer of oil within the next five years. Further, the U.S. could become energy independent by 2035 and a net exporter of natural gas by the end of this decade.
However, the current oil production is showing little signs of waning and the ongoing turbulence in Algeria, Nigeria, Egypt and Syria could take a toll on the total oil supply going forward. This, coupled with rising oil demand on the back of improving global conditions, would lead to higher oil prices and the resultant upsurge in the oil producer companies, at least for the short term.
Given the optimism and promising growth outlook, investors seeking to ride this sudden move might want to tap the space in ETF form. For these investors, we have highlighted the top performing energy ETFs over the past few weeks. Investors could enjoy smooth trading in the months ahead, should oil price rise or remain firm thanks to global issues and increased demand (see: all the energy ETFs here).
This trio of funds could be excellent plays for investors who believe that oil will continue to move upward, and finally lead the commodity world higher (read: Time for This Top Ranked Energy ETF?).
Market Vectors Oil Services ETF (OIH)
This fund provides exposure to the 26 most liquid firms by tracking the Market Vectors US Listed Oil Services 25 Index. With AUM of more than $1.5 billion and average daily volume of about 4 million a day, this is one of the largest and most popular in the energy ETF space.
The product is concentrated across its top 10 securities at more than 62% of total assets and is tilted towards large cap stocks. Schlumberger (SLB - Analyst Report) takes the top spot at 21.7%, closely followed by Halliburton (HAL - Analyst Report) and National Oilwell (NOV) at 8.5% and 6.44%, respectively.
Apart from the U.S. companies, the fund also provides exposure to Switzerland, Bermuda, Luxembourg, United Kingdom and the Netherlands. The ETF charges a fee of 35 bps annually and added over 5% in the past two months. OIH is up 18.35% so far this year (read: More Trouble for Oil Services ETFs?).
iShares U.S. Oil Equipment & Services ETF (IEZ)
This fund follows the Dow Jones U.S. Select Oil Equipment & Services Index, holding 50 stocks in its portfolio. It has amassed $401.4 million in its asset base and trades in good volume of more than 110,000 shares per day. The ETF charges 46 bps in annual fees from investors.
Like its Market Vectors counterpart, IEZ allocates 68.76% of the assets in top 10 holdings, with Schlumberger, Halliburton and National Oilwell holding the top three spots. While large caps stocks account for nearly 66% of the assets, mid and small caps take the remaining portion in the basket (read: Energy ETFs Rise on Schlumberger Earnings Beat).
The fund gained nearly 5.2% over the past two months and is up 19.5% in the year-to-date period.
iShares U.S. Oil & Gas Exploration & Production ETF (IEO)
This ETF tracks the Dow Jones U.S. Select Oil Exploration & Production Index and holds 61 securities in total. The product has been able to manage assets worth $375.3 million and trades in good volume of 117,000 shares per day.
Here again, company-specific risk is high as indicated by a concentration level of 62.80% of assets in the top 10 holdings. In fact, the top firm – Occidental Petroleum (OXY) – dominates the fund return with a 13.24% share, followed by Anadarko Petroleum (APC - Analyst Report) and EOG Resources (EOG) at 8.57% and 7.97%, respectively (see more in the Zacks ETF Center).
The fund gained over 5.6% in the past two months and has delivered strong returns of 20.5% in the year-to-date period.
These energy ETFs could be worthwhile when natural resource prices are rising. This is especially true with the dollar showing some weakness of late and investors regaining confidence in the broad commodity world, suggesting any of these funds could be interesting choices to play oil strength in the near term (read: 3 Metal ETFs to Buy on the Commodity Upswing).
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