Weigh Your Options With Energy ETFs

For many investors, exchange-traded funds could make more sense than commodity futures or oil and gas stocks.
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Until recently, the only way for investors to have exposure to the energy space was to either invest in commodity futures or to buy oil and gas stocks.

Thanks to the era in which we live, there might be a better way -- exchange-traded funds. The advent of ETFs has offered many investors the solution they were looking for, and today's offerings present a broad number of options.

According to Ron Delegge, president of

ETFguide.com

, investors in ETFs must first choose whether they are looking for a passive fund that would help anchor the foundation of a portfolio, or an active investment with the added risks and benefits that a specialized trading strategy can bring. Once that decision is made, investors should then look at the particular holdings of an ETF and compare expense ratios to see which funds offer the most value.

This article is the first of a two-part series on energy ETFs, and it will present some high-performing ETFs for passive investors. Actively managed funds will follow in a later column.

First up, the

iPath Dow Jones-AIG Commodity Index

(DJP) - Get Report

. As the name suggests, this fund tracks the Dow Jones-AIG Commodity Index, which aims to represent a diversified portfolio of energy, metal and agricultural commodities. The ETF holds a fixed-weight ratio of holdings, and its expense ratio is 0.75%.

The iPath Dow Jones-AIG Commodity Index has a three-month yield of 9.3%, a year-to-date yield of 8.1% and a one-year yield of 21.5%. Its exposure to commodities presents a natural hedge against the ongoing decline in the value of the U.S. dollar, and the breadth of its holdings offers protection against the possibility that the current values of energy commodities are inflated relative to agricultural or metal commodities.

Next is the

iShares Dow Jones U.S. Oil & Gas Exploration Index

(IEO) - Get Report

, a tracker for the Dow Jones U.S. Select Oil Exploration & Production Index. It holds stocks of companies involved in domestic exploration and production of oil and natural gas, such as

Apache

(APA) - Get Report

,

Chesapeake Energy

(CHK) - Get Report

and

Occidental Petroleum

(OXY) - Get Report

. The fund uses a capitalization approach to weight its holdings, and its expense ratio is 0.48%.

The fund recently took a hit along with most energy equities, but it is one of the best performers in the space. Many energy stocks, including those of the major integrated energy companies and oil-service firms, have recently moved lower along with domestic equity indices on the notion that their operations would be affected by a slowdown in the global economy.

However, the E&P sector has been mostly immune to the downturn, as it is generally thought that the procurement of new wells would continue even if the economy were to bog down. The iShares Dow Jones U.S. Oil & Gas Exploration Index posts a year-to-date yield of negative 0.8%, but it is up 28.8% in the past 12 months.

Then there's the

SPDR S&P Oil & Gas Exploration & Production

(XOP) - Get Report

ETF, which follows the oil and gas E&P portion of the S&P Total Market Index. Its holdings include domestic oil and gas producers like

Cabot Oil & Gas

(COG) - Get Report

,

Encore Acquisition

(EAC)

,

Range Resources

(RRC) - Get Report

and

XTO Energy

(XTO)

. The fund uses a fixed-weight approach to asset allocation, and its expense ratio is 0.35%.

Like the iShares Dow Jones U.S. Oil & Gas Exploration Index, this fund's focus on U.S. exploration and production leaves it in a good position to take advantage of strong growth in this niche of the broader energy complex. It has fallen nearly 1% year-to-date, but over the past year is up more than 27%.

Finally, there's the

iPath S&P GSCI Crude Oil Total Return Index

(OIL) - Get Report

, a fund linked to the performance of the Goldman Sachs Crude Oil Total Return Index and unleveraged investments in Nymex West Texas intermediate crude oil futures. It uses a fixed-weight approach to determining the asset allocation of its portfolio, and its expense ratio is 0.75%.

The near-month crude futures contract on the Nymex has appreciated 10% since the first of January, while the iPath S&P GSCI fund gained 6.3% over the same period. Large builds in crude stores and economic data pointing to a slowdown in the global economy have so far been unable to halt the advance in crude prices.

Furthermore, with the U.S. currency in a state of perpetual decline and oil being denominated in dollars, crude has grown into a safe haven to protect investment dollars from currency risk. These issues make an oil-linked ETF like this choice an attractive investment for anyone seeking a direct connection to commodity futures or a hedge against the falling dollar.