Although I have written that I don't believe having too many ETFs is really a big issue, I am a little puzzled by some recent listings from PowerShares.

On Sept. 20, PowerShares listed nine sector ETFs constructed with Robert Arnott's fundamental indexing method. On Oct. 12, PowerShares listed 10 sector and subsector ETFs (11 in total that day) based on a different methodology they call "Intellidexing."

Between the two batches of ETFs, it duplicated eight sectors.

Because the energy sector is struggling of late, it's useful to explore the two new energy ETFs: the PowerShares Dynamic Energy Sector Portfolio ( PXI) and the PowerShares FTSE RAFI Energy Portfolio ( PRFE).

My initial reaction is to question the utility of more domestic energy funds that own Exxon Mobil ( XOM), Chevron ( CVX) and Conoco ( COP). The two new funds are much different from each other for funds that invest in the same sector, but PRFE doesn't seem to be very different from some existing sector ETFs.

The Arnott-based or RAFI version, PRFE, looks a lot like the Energy Sector SPDR ( XLE). Both funds have 23% in Exxon Mobil. The RAFI fund has 16% in Chevron, while XLE has 13% in Chevron. Coming in at the No. 3 holding for both is Conoco, at 8% of PRFE and 9% of XLE. There are even more similarities in composition.

PowerShares FTSE RAFI Energy Portfolio
PRFE looks like the Energy Sector SPDR but has slightly outperformed its underlying S&P Energy Index
Source: PowerShares

Despite the similarities, PRFE has slightly outperformed the S&P Energy Index that underlies the XLE. That may be because PRFE has an element of active management to it, based on a screen that is run on a regular basis.

This means that over the life of the backtest, changes have been made; even though the two funds look very similar today, they may not have been so similar in the past and may not be so similar in the future. Even so, it is not clear why PowerShares is listing a fund that for now looks identical to most of the other energy ETFs.

In the last two paragraphs, you can substitute for the XLE either iShares DJ Energy Index Fund ( IYE) or the Vanguard Energy ETF ( VDE) because the numbers are almost identical.

The Intellidex version, PXI, is uniquely structured compared with the rest of the bunch.

PowerShares Dynamic Energy Sector Portfolio
PXI is uniquely structured compared with the rest of the bunch
Source: PowerShares

In PXI, Exxon is tied with Chevron for the top holding, but both names are only weighted at 2.64% each. The smaller weight in the mega-cap names gives PXI a dramatically smaller average market cap of $25 billion, vs. $151 billion for the RAFI version.

Exxon Mobil vs. Energy Sector SPDR
Dynamic Energy is less likely to feel Exxon's drag
Source: BigCharts.com

It is not a shock that the backtest of PXI outperformed the back test of PRFE. The biggest of the big usually provides leadership for only a small portion of the typical stock market cycle. While PXI is certainly not a small-cap fund, the roughly 20% more exposure to Exxon in almost every other fund has caused a drag that will not hurt PXI as badly.

Anyone with interest in any of these funds should know that they all miss something big: foreign exposure.

iShares has a foreign energy ETF, iShares S&P Global Energy ( IXC), and WisdomTree also has a foreign sector ETF in the works that could be out as soon as this month.

I feel very strongly that having foreign exposure in the energy sector is important. Often, foreign energy companies are a little smaller (and more nimble), have higher dividend yields and offer exposure to other countries with the relative predictability of a more mature industry.

If you want to own any of the domestic energy ETFs, I believe some sort of foreign exposure should be paired with it.


Please note that due to factors including low market capitalization and/or insufficient public float, we consider PowerShares Dynamic Energy Sector Portfolio, PowerShares FTSE RAFI Energy Portfolio and Vanguard Energy ETF to be small-cap stocks. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.
At the time of publication, Nusbaum was long iShares S&P Global Energy, although positions may change at any time.

Roger Nusbaum is a portfolio manager with Your Source Financial of Phoenix, Ariz., and the author of Random Roger's Big Picture Blog. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Nusbaum appreciates your feedback; click here to send him an email.