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Dion's Weekly ETF Blog Wrap

A Better Way to Play the Oil Drillers

Published 9/29/2010 12:02 p.m. EDT

The iShares Dow Jones US Oil Equipment Index (IEZ) had an impressive (if volatile) performance this morning, and the oil-services subsector looks promising in late 2010. While IEZ is leading the pack of oil-service ETFs today, I'd encourage investors to check out SPDR S&P Oil and Gas Equipment and Services ETF (XES) instead.

As a cap-weighted fund, IEZ is extremely top heavy, allocating more than 17% of its underlying portfolio to Schlumberger (SLB). In the wake of the BP (BP) disaster, it has become pretty clear that you don't want to stake all your energy exposure on one firm -- it is better to use a fund that mitigates security-specific risk.

XES uses an equal-weight methodology so that investors have minimal risk when it comes to swings in single components. XES' top five components -- Pride International (PDE), Superior Energy (SPN), McDermott (MDR), Transocean (RIG) and National Oilwell (NOV) -- comprise just 4.32%, 4.32%, 4.12%, 4.11% and 4.11% of the underlying portfolio, respectively. By spreading out assets among 27 underlying holdings, XES' construction helps to minimize the risk of blowups.

A recent report showing that crude supplies are lower than expected should continue to help energy subsectors involved with this commodity in the weeks ahead. As we move into winter and people in the U.S. begin to fire up their heating, XES should continue to benefit from the season shift as well as the lower-than-expected oil supplies.

At the time of publication, Dion Money Management had no positions in stocks mentioned.
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