New ETF Drills Into Fracking Space

NEW YORK ( TheStreet) -- This week Van Eck launched the Market Vectors Unconventional Oil & Gas ETF ( FRAK). The ticker symbol gives an indication that fracking (hydraulic fracturing) of shale oil and shale gas is a key theme in the fund. Other so-called unconventional extraction methods targeted by the fund include coal seam gas, coal bed methane and even oilsands.

The fund has 44 constituent holdings but some of the largest names are more like large diversified energy companies with varying levels of involvement in the "unconventional oil and gas" space. Occidental Petroleum ( OXY) is the largest holding in the fund at 8.5%, EOG Resources ( EOG) 7.4% and Devon Energy ( DVN) 6.4% all have wide footprints across the energy industry including unconventional methods like fracking. Canadian Natural Resources is also a large holding at 7.6% and is a mostly in oilsands but still diversified.

When I first heard of the fund I figured it would be a small-cap-oriented product but really it is more mid cap. FRAK has an average weighted market cap of $20 billion compared to $129 billion for Energy Select Sector SPDR ( XLE) and just over $1 billion for the PowerShares S&P Small Cap Energy Portfolio ( PSCE). The average weighted market for XLE is so large because over 30% of the fund is allocated to Exxon Mobil ( XOM) and Chevron ( CVX).

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From the top down, smaller cap is usually more volatile than larger cap. This has been the nature of the relationship between PSCE and XLE. On the way up PSCE goes up more that XLE and on the way down PSCE goes down more than XLE. As more of a mid cap product it is likely that the new fracking ETF will trade between the two most of the time, at least until some of the controversy surrounding fracking subsides.

There is currently a debate under way as to what the environmental consequences of fracking are. There is some evidence that it might actually cause earthquakes. Although this issue has not been resolved yet, the bullish case for the new Unconventional Oil & Gas ETF is that energy prices go higher causing more widespread reliance on unconventional methods despite any environmental concerns. The bear case is that energy prices stay where they are or go lower making it more difficult for the industry to overcome the environmental issues.

Investors interested in this segment will be aware that this has been a political issue. President Obama has not been a supporter of fracking. A change in the White House could be a positive catalyst or perhaps market forces will dictate a change in Obama's position. This all means that more so than many industries, investors in FRAK will need to pay particularly close attention to the political side.
At the time of publication, Nusbaum held no positions in any of the stocks mentioned, although positions may change at any time.

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.