Small-Cap Energy ETFs Vie for Volatility

NEW YORK ( TheStreet) -- The Oklahoma Exchange Traded Fund ( OOK) is a way to access domestic, small-cap energy stocks. A couple months later, Jefferies came out with the Jefferies TR/J CRB Wildcatters Exploration & Production Equity ETF ( WCAT).

The big story with the Oklahoma Exchange Traded Fund -- in addition to the smaller exposure that an investor can get through the Energy Select Sector SPDR ( XLE) -- is that it provides more volatility, which, at times, is a good thing. While the Oklahoma fund has been a little more volatile and outperformed the Energy Select Sector SPDR, the Wildcatters fund has been even more volatile and a better performer.

Since the Wildcatters fund debuted in January, it's up 1.1% versus a decline of 0.4% for the Oklahoma fund and a drop of 8.8% for the Energy Select Sector SPDR. There are two reasons for the outperformance of the smaller-cap energy ETFs. From the top down, small-cap stocks have done better coming out of the massive stock-market decline.

The other reason comes from the bottom up, and the Energy Select Sector SPDR's huge exposure to Exxon Mobil ( XOM), which is currently 18%. Exxon is down 9.6% in the period cited above. It also has lagged behind the broader market.

The Oklahoma fund has a couple recognizable companies, such as Devon Energy ( DVN) and Williams Cos. ( WMB).

The Wildcatters fund has even fewer familiar names. The largest holding is SM Energy ( SM), at 6.8% of the ETF, followed by Mariner Energy ( ME), 5.16%, and Progress Energy Resources ( PRQ), 4.5%. The ETF has 59 holdings.

Looking a little closer, the Wildcatters ETF is 67% invested in U.S. companies and 33% in Canadian. At the industry level, 64% is in natural gas and 32% in oil.

The Gulf spill is the biggest story in the world now, yet we don't know the consequences -- environmentally or fundamentally -- for the industry.

This uncertainty could turn out to be a big catalyst for the Wildcatters fund. One plausible result is that BP ( BP) will no longer be able to do business in the U.S. In addition, the political fallout has called into question the viability of deepwater drilling. For sure, there will be more regulations and steeper drilling costs.

That may result in more investment capital flowing into smaller energy companies, which would benefit the Wildcatters ETF.

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Roger Nusbaum is a portfolio manager with Your Source Financial of Phoenix, 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.

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