Slick Picks for Oil Stock ETFs

Editor's note: Don Dion is a money manager and publisher of the Fidelity Independent Adviser family of newsletters, which provides his commentary on the financial markets, with a specific emphasis on mutual funds and exchange-traded funds.

There are many oil stock ETFs that offer investors different ways to play the oil industry, but after accounting for fees, volume and assets under management as well as comparing the portfolios, the options can be whittled down to a few best choices. Most of these ETFs are heavily tied to the oil industry and there may be significant exposure to natural gas, but I've left off energy funds that have significant exposure to coal or alternative energy.

First up are the broad energy ETF, consisting of three large funds with more than half a billion in assets and two smaller funds. The larger funds have very similar weightings, with about 60% of the portfolio concentrated in the top 10, and Exxon Mobil ( XOM) and Chevron ( CVX) are the largest holdings by far. The three have very similar performance and therefore, the best choice is to stick with the largest and cheapest option -- SPDR Energy ( XLE).

The two smaller funds offer two different strategies. PowerShares Dynamic Energy ( PXI) uses the Intellidex Index. According to PowerShares, "The Index thoroughly evaluates companies based on a variety of investment merit criteria, including fundamental growth, stock valuation, investments and risk factors. Securities shown to possess the greatest capital appreciation potential are selected by the Index."

Rydex S&P Equal Weight Energy ( RYE) is the other fund, which equally weights the holdings. Last fall both of these strategies underperformed the market. Since early April, when oil prices started a determined rise, they have outperformed but still lag over one- and two-year time periods. With only a small amount of assets and higher fees, the larger funds make better options.

When it comes to the international energy ETFs, by assets and fees iShares S&P Global Energy ( IXC) is the choice by far. IXC is a global fund whereas the other two are exclusively international, but this hasn't led the fund to over- or underperform widely from the other two.

There are two groups of subsector funds -- equipment and services and exploration and production. The former has four funds available and three have acceptable fees and assets under management.

iShares Dow Jones U.S. Oil Equipment & Services ( IEZ) has the most assets and largest volume, but the SPDR S&P Oil & Gas Equipment & Services ( XES) and PowerShares Dynamic Oil & Gas Services ( PXJ) are not far behind.

Furthermore, the three portfolios have different constructions -- IEZ's cap-weighted approach has Schlumberger ( SLB) at number 1 with 21.1% of assets. XES and PXJ have more balanced portfolios; the top holding in XES is Nabors Industries ( NBR) at 5.4%, while PXJ's top holding is Transocean ( RIG) at 5%. Both funds also have less than 46% of assets among the top 10, compared to 65% for IEZ.

Although they have similar returns, XES has had slightly better performance and offers the lowest fees, so therefore is the best choice. Another fund, First Trust Energy AlphaDEX ( FXN) (FXN), has only 9 million in assets but has a quantitative portfolio selection method that results in the top two holdings of Key Energy Services ( KEG) (KEG) and Oil States International ( OIS). It has 36% of assets in the top 10, making it the least concentrated. Long-term, its returns are similar to the other funds, but this year it has underperformed by about 20 percentage points.

Finally, of the three exploration and production ETFs, the choice here is slightly easier because PowerShares Dynamic Energy Exploration & Production ( PXE) holds Exxon and Chevron as its top two holdings. This frequently caused PXE to underperform the other two funds.

Between iShares Dow Jones U.S. Oil & Gas Exploration & Production ( IEO) and SPDR S&P Oil & Gas Exploration & Production ( XOP), the major difference is not performance or assets but rather that XOP is less concentrated, with higher volume and lower fees. Here again, the SPDR looks to be the best choice for both long- and short-term investors.

SPDRs generally have the better energy ETFs for long-term investors, except for the low-volume SPDR S&P International Energy ( IPW) (IPW). In that case, iShares S&P Global Energy ( IXC) offers the best option.

Oil ETFs
Fees Top 10 (%) Volume (000s) AUM
SPDR Energy XLE 0.21 63.2 11,702 4,530
Vanguard Energy VDE 0.25 61.3 251 749
iShares Dow Jones U.S. Energy IYE 0.48 63.2 692 694
PowerShares Dynamic Energy Sector PXI 0.6 25.2 25 28
Rydex S&P Equal Weight Energy RYE 0.5 31 8 8
iShares S&P Global Energy IXC 0.48 56.3 193 745
WisdomTree International Energy DKA 0.58 58.9 11 30
SPDR S&P Intl Energy IPW 0.5 57.2 3 5
iShares Dow Jones U.S. Oil Equip & Svcs IEZ 0.48 64.9 412 268
SPDR S&P Oil & Gas Equip Svcs XES 0.35 45.9 199 204
PowerShares Dynamic Oil & Gas Services PXJ 0.63 45.7 149 181
First Trust Energy AlphaDEX FXN 0.7 36.3 5 9
iShares Dow Jones U.S. Oil & Gas Expl & Prod IEO 0.48 57.2 550 376
SPDR S&P Oil & Gas Expl & Prod XOP 0.35 38.8 2,400 347
PowerShares Dynamic Energy Expl & Prod PXE 0.63 46.4 27 59

Don Dion is the publisher of the Fidelity Independent Adviser family of newsletters, which provides to a broad range of investors his commentary on the financial markets, with a specific emphasis on mutual funds and exchange-traded funds. With more than 100,000 subscribers in the U.S. and 29 other countries, Fidelity Independent Adviser publishes six monthly newsletters and three weekly newsletters. Its flagship publication, Fidelity Independent Adviser, has been published monthly for 11 years and reaches 40,000 subscribers. Dion is also president and founder of Dion Money Management, a fee-based investment advisory firm to affluent individuals, families and nonprofit organizations, where he is responsible for setting investment policy, creating custom portfolios and overseeing the performance of client accounts. Founded in 1996 and based in Williamstown, Mass., Dion Money Management manages assets for clients in 49 states and 11 countries. Dion is a licensed attorney in Massachusetts and Maine and has more than 25 years� experience working in the financial markets, having founded and run two publicly traded companies before establishing Dion Money Management.

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