New Oil Subsector ETFs Prove Refined

The two equipment and services funds are also quite similar, having nine out of the top stocks in common. Here I would give the nod to the State Street product, XES, because the largest holding, Schlumberger(SLB), only comprises 3.8% of the fund, compared to 17.6% in the iShares version.

The importance of this portion of the energy sector should be clear. Everyone knows that energy prices are high by historical standards. I believe they will stay high for the simple reason that demand is growing faster than new supply is coming onto the market.

The context of this idea needs to be viewed properly. Too often, when TV commentators talk about this, they narrow the discussion to this year's driving and hurricane seasons. I think the proper context is to think in terms of years. As Ned Davis pointed out in Barron's last weekend, the U.S. uses 25.8 barrels of oil per capita per year; China uses 1.8 barrels, and India 0.8 barrels. Since each of the latter two countries has more than 1 billion inhabitants, even small upticks in consumption in those areas could have a big impact on global demand.

This dynamic makes the energy sector attractive. The biggest threat to a given integrated oil company is dwindling proven reserves, or even the appearance that reserves could be dwindling. This is where E&P and equipment and services come in. Not to be too simplistic, but these companies work with the mega-cap integrated companies you have heard of here at home, and they also work with the national oil companies in all of the other oil-producing countries in the world.

These ETFs allow investors to capture these companies without having to be an expert on the geopolitics of Nigeria or Bolivia. Owning the wrong single stock during a political crisis can cause some damage in a portfolio, whereas the impact of, say, Hugo Chavez, has less impact on an investment product.

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