Go to the Bench for Oil Substitute

A way to use ETFs is as a substitute for a stock. If investors need to sell a stock for tax reasons they can switch into a similar ETF that captures most of the effect of owning the stock. Later on they can sell the ETF and buy the same stock back.

I made such a substitution trade Monday for clients, selling British Petroleum (BP) and buying WisdomTree International Energy Fund (DKA).

My clients have owned BP for several years. The case for BP is simple: It's a mega-cap, integrated oil company with a big presence in many emerging markets and has a very healthy 3.5% yield. BP has had more than its fair share of problems, including a deadly refinery accident in Texas for which it is being sued, a pipeline shutdown in Alaska and allegations of price fixing in various markets.

While the stock is down from its high, its year-to-date performance lags only slightly behind Total's (TOT), another giant foreign energy stock. Longer term, I think BP is a worthy hold, but for the next six to nine months, the stock won't be able to outperform its sector.

WisdomTree International Energy seems the best proxy. First, BP is the largest single holding at 9.1% after the two different stocks for Royal Dutch Shell, which add up to 16% of the fund. If I am wrong about BP and the stock skyrockets, WisdomTree International Energy will clearly benefit. As with all WisdomTree funds, WisdomTree International Energy focuses on yield, and it pays 3.24%, almost as much as BP but with nowhere near the risk.

Another reason I chose WisdomTree International Energy is that I'm looking for foreign exposure, and most of the other energy ETFs have enormous positions in Exxon Mobil (XOM), which is not a name I want to own. It is the biggest of the oil stocks by market cap, and usually the giants lag their sectors for most of the market cycle.