New Natural Gas ETF Is Risky

NEW YORK ( TheStreet) -- The new natural gas ETF from Jefferies ( JEF) should not be the cornerstone of your energy holdings.

Launched Wednesday, the Wildcatters Exploration & Production Equity ETF ( WCAT) offers exposure to small- and mid-cap firms in the oil and natural gas sectors.

While exposure to these firms may be helpful in balancing your energy holdings, WCAT will be more volatile than established funds like the First Trust ISE-Revere Natural Gas Index Fund ( FCG), which tracks larger-cap names.

WCAT joins other popular funds like United States Natural Gas ( UNG) and FCG in offering exposure to the natural gas sector with a small-cap twist. WCAT has an expense ratio of 0.65% and 55 underlying holdings.

The top three holdings in WCAT's underlying portfolio -- Forest Oil ( FST), Encore Acquisition ( EAC) and St. Mary Land & Exploration ( SM) -- make up 5.77%, 5.09% and 4.69% of the fund respectively.

Buying into a portfolio of small-cap companies can be a volatile proposition, but WCAT's methodology helps to mitigate the risk of trying to pick single natural gas stocks. A wave of small-cap ETFs like WCAT have helped to round out an ETF universe still dominated by market-cap weighted funds.

Equity funds like WCAT and FCG also help to provide exposure to natural gas prices without relying on the purchase of natural gas contracts. UNG, which is designed to track a basket of NYMEX-traded futures, has been the target of commodities reform in recent months.

Quartered in both the United States and Canada, WCAT's holdings offer a higher-beta play on the natural gas and oil sectors. While investment in these small-cap stocks may be risky, they also offer the potential for merger and acquisition activity and higher growth.

Top component FST Forest Oil has several years of promising onshore drilling prospects, with core holdings in emerging Texas and Canadian tight gas and gas shale properties. The company is currently planning on selling more than $1 billion in assets to reduce current debt and provide additional liquidity.

Natural gas firms are a promising long-term play in a sector where global demand continues to increase. Prospective WCAT investors, however, should give this new ETF some time to gain traction before scooping up shares.

WCAT faces two challenges when it comes to liquidity: the liquidity of its underlying stocks and the liquidity of the ETF as a whole during daily trading. Small-cap companies are less liquid than large-cap stocks, and most ETFs take some time to attract investor attention.

Small-cap ETFs like WCAT are welcome additions to the ETF industry, but they should be considered in conjunction with a broader portfolio.

-- Written by Don Dion in Williamstown, Mass.
At the time of publication, Dion did not have any holdings in the equities mentioned.

Don Dion is 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.

Dion also is 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.

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