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Oil Services ETFs Head-to-Head: XES vs. OIH

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The oil prices started to threaten global investors from the second half of 2014 and are still exhibiting a volatile trend. While crude saw the strongest two-week gain in 17 years in early February on sharp spending cuts by big U.S. oil drillers like BP Plc. (BP - Free Report) and Exxon Mobil Corp. (XOM - Free Report) and a fall in U.S. dollar, it soon took a dive on hefty U.S. storage report.

Then, the prices once again shot up to start March after Saudi Arabia hiked the official prices for its oil indicating higher global demand. A spate of rate cuts across the world should boost manufacturing activities and personal consumption which in turn propel the demand for oil.

Notably, the U.S. itself used 19.5 million barrels of petroleum products daily in December, leading to the four-year high December data (read: Natural Gas ETF (UNG) Warms Up on Arctic Chills).

To add to this, the latest unrest in Libya, which is a key oil-exporting nation, firmed up oil prices slightly and spread optimism in the sector. On the other hand, after prolonged sell-offs, oil services ETFs are now selling cheap at the current level giving investors a reason to throng the space. Whatever the case, high levels of volatility will remain in the space.

Given this, investors interested to play the risky sector, should be doing so with better performing funds. Notably, despite the lackluster run so far in the energy ETFs segment, investors have seen disparity in the level of return in a closely related industry.

Below we have discussed two funds. While they might appear similar at first glance, there are actually a number of key differences that investors need to be aware of before making a choice on this extremely bold sector play (read: Oil Price Above $50: 3 ETFs to Watch):

SPDR S&P Oil & Gas Equip & Service (XES)

XES tracks the S&P Oil & Gas Equipment & Services Select Industry Index providing exposure to a basket of 52 stocks involved in oil drilling operation. Sector wise, Oil & Gas Equipment & Services occupies about 73% of fund assets followed by 27.1% to Oil & Gas Drilling.

In terms of top holdings, the fund is well spread out as the top company, Basic Energy Services, only makes up 2.9% of assets while all the top 10 securities make up just one-fourth part of the portfolio. The fund is biased on smaller capitalization and invests three-fourth of the basket in it while mid cap stocks take about 20% of the basket.

The fund manages an asset base of $212.2 million and has lost about 39% in the last one year (as of March 3, 2015). The fund currently has a Zacks ETF Rank #5 (Strong Sell) with a High risk outlook.

Market Vectors Oil Services ETF (OIH)

OIH tracks the Market Vectors US Listed Oil Services 25 Index. The index invests over $1 billion of assets in 26 holdings. OIH devotes as much as 20.5% of the portfolio weight to Schlumberger Ltd. (SLB), followed by 11.7% in Halliburton Company (HAL) and 8.20% in Baker Hughes Inc. (BHI) (read: After Earnings, How Are Oil Service ETFs Looking for 2015?).
Contrary to XES, this product is heavy on large caps as evident by half of the portfolio invested in it followed by mid caps taking 37% share in the product. OIH also charges 35 bps in fees (see all the Energy Equity ETFs here).

The fund was down about 26% during the last one-year period (as of March 3, 2015). OIH also has a Zacks ETF Rank #5 with a High risk outlook.

Data Point XES OIH
AUM $212.2 million $1,073 million
Average Daily Volume 300,000 shares 8,500,000 shares
Assets in top ten holdings 25.72% 70.96%
Total Holdings 52 26
Capitalization 73% small caps 50% large caps
Expense Ratio 0.35% 0.35%
Performance (YTD) -5.2% -2.8%
Dividend Yield 1.71% 2.46%

Bottom Line

Among the above-mentioned choices, XES is tilted toward smaller caps while OIH is differently structured. Investors should note that smaller firms find it difficult to arrange for loans in a tough industry environment. Moreover, smaller companies lack a scale advantage to survive hard times unlike their bigger cousins.

Plus, OIH trades at an ample volume of 8,500,000 shares a day thereby resulting in a tight bid/ask spread and low trading costs. On the other hand, trading costs will be higher for XES thanks to its paltry trading volume. Higher dividend yield is also an added attraction for OIH. All these helped OIH perform better than XES in the past few months.
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