BP Stock Drop Hits Energy ETFs

NEW YORK (TheStreet) -- Exchange-traded funds are designed to hold bundles of securities, but investors still need to know what their funds hold. Case in point: BP(BP).

The battered energy producer has spent $2 billion trying to address a massive oil spill in the Gulf of Mexico. Its shares have plunged 47% since the spill began on April 20. The stock figures prominent in many energy ETFs.

BP has a 4.4% weighting in the iShares S&P Global Energy Sector Index Fund(IXC), a 5.2% weighting in the WisdomTree International Energy Sector Fund(DKA) and an 8.3% weighting in the SPDR S&P International Energy Sector ETF(IPW). The company also has a 7% weighting in the iShares MSCI United Kingdom Index Fund(EWU). As large as these positions seem, they were double-digit weightings before the Deepwater Horizon oil leak crushed its shares.

BP's pain has dragged down the funds that hold the stock. In the past two months, WisdomTree International Energy has lost 14%, SPDR S&P International Energy has dropped 15% and the domestic Energy Select SPDR ETF(XLE) has fallen 6.2%. The stock decline hit the funds hardest during the first week after the leak began. As the weightings shrank, the stock affected the funds less.

Looking forward, the SPDR International Energy stands to gain if BP rebounds from the fallout of its decision to suspend its dividend. The fund has an 8% weighting. Conversely it will suffer the most if the worst case scenario plays out and the company goes out of business. While going to zero is a remote possibility, going down a lot from here is possible.

The potential drag caused by a stock with a 15% to 20% weighting in an ETF can be meaningful. The WisdomTree fund was scheduled to have BP removed from it on June 18. This fund is dividend weighted and so a stock that no longer pays dividend is no longer eligible to remain in the fund. Because the iShares and SPDR funds are market-cap weighted, BP is likely to remain in those funds.

There are many narrower ETFs with huge weightings in one or two stocks. The Energy Select SPDR ETF mentioned above has 18% in Exxon Mobil(XOM) and 13% in Chevron(CVX). If a disaster were to occur at an Exxon or Chevron site, the Energy Select Sector SPDR will be the one to lag the other energy sector ETFs.