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Play An Oil Bull With These Three Emerging Market ETFs

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Thanks to tensions with Iran and an improving economy, oil prices are once again surging higher. The price of WTI crude oil is now firmly above the triple digit level while Brent crude, the main European benchmark, is even higher, with prices hovering near the $125/bbl. mark, both of which do not look likely to come down soon.

In fact, many analysts are looking for further increases as we approach the spring and summer, suggesting that it could be the start of another year with high prices at the pump.

In order to prepare for this, many investors have looked at energy stocks and ETFs so that they too can profit from the rising sentiment regarding the sector. This is best seen by the nearly $750 million in inflows to the Energy SPDR (XLE) so far this year, as well as the more than $550 million that has flown into the Alerian MLP ETF (AMLP) and the $125 million that has gone into the Market Vectors Oil Services ETF (OIH) in the same time period.

While these are good ways to play a rising price of crude in equity form, it appears as though many investors have overlooked emerging markets for possible destinations for energy exposure as well (see Three ETFs For A Nuclear Power Renaissance).

This could be troubling because often times, these markets have the most to gain or lose from higher energy prices and can see greater volatility in their stock prices on average. In addition to this factor, these are among the big growth markets for energy use and production, especially as many Western markets continue to remain sluggish in terms of growth and impede further production and exploration of hydrocarbon sources.

Although, even if Western nations were more friendly to increased production, one has to wonder how much it would actually help; of the twenty countries with the biggest proven reserves of oil, only Canada (3rd) and the U.S. (13th) are developed markets. This means that the vast majority of the world’s new oil fields will likely be in developing nations, much to the dismay of many integrated oil firms which are heavily exposed to Europe and, to a lesser extent, North America (read Does Your Portfolio Need A Coal ETF?).

This suggests that many oil companies will have to focus in on emerging markets in order to both produce more oil and sell more to consumers. Thanks to this factor, many investors may want to consider seeking more exposure to emerging market focused energy firms at this time.

Not only will it help to spread out the risk of the portfolio across national lines, but it could also allow investors to ride the oil bull in a new way. For these investors, any of the following three options could make for very interesting choices:

EGShares Energy GEMS (OGEM)

For investors seeking a broad play on emerging market energy companies, OGEM will be tough to beat. The product invests in about 30 companies from developing countries around the world that are engaged in some aspect of the energy industry. Top countries include the BRIC group, with Russia (33%), and China (22%) leading Brazil and India which combine to make up another 20% of assets.

Industry exposure is focused on oil and gas integrated firms (57%), while exploration and production companies make up another quarter of assets. Large caps dominate the holdings list as well known names like Gazprom (GZPFY), Petroleo Brasilerio (PBR) and CNOOC (CEO) take the top three spots. The product charges investors 85 basis points a year but pays out 2.0% a year in dividends (see Three Overlooked Emerging Market ETFs).

Global X China Energy ETF (CHIE)

If investors are looking to make a broad play on the second biggest consumer of oil in the world, after the U.S., CHIE could be the way to go. The product is well diversified across sectors, and does not focus on any one type of energy. In fact, integrated firms make up the most at about 20% while coal takes the next spot, followed by exploration and alternative energy.

The fund holds 30 securities in total and puts top individual weights in China Petroleum and Chemical (SNP), CNOOC, and PetroChina (PTR). Like many energy funds, it has a definite focus on large caps, although growth companies do dominate the holdings list. In terms of expenses, the fund charges a reasonable 65 basis points a year while yielding about 1.8% on an annual basis (see Forget FXI: Try These Three China ETFs Instead).

Market Vectors Russia ETF (RSX)

While not a ‘pure play’ on oil, the economy of Russia is heavily dependent on hydrocarbons to power growth. In fact, Russia is currently vying with Saudi Arabia to be the world’s top oil producer, although the nation still trails heavily in terms of exports (but is still 2nd on earth in this category too).

The main ETF tracking the country, RSX, reflects this putting close to 40% of its assets in the broad energy sector. In fact, integrated firms make up nearly 30% of the entire fund, crushing the next biggest industry weight, which is banks at 12% of assets (read Is Now The Time To Buy Russia ETFs?).

This is further reflected by looking at the top ten holdings of the ETF as energy makes up six of the top ten spots including four of the top five individual holdings. Thanks to this focus on large caps and the reasonably sized market of Russia, the product has seen great interest, attracting close to $2 billion in assets, a factor that should keep bid ask spreads quite low. However, investors should note that the fund does charge investors 0.71% a year in fees but yields 1.84% in the process.

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