Would This Energy ETF Be a Better Fit for Your Portfolio?
Feb 17th 2013 2:00PM
Updated Feb 18th 2013 1:00AM
Exchange-traded funds are all the rage these days. With the all-day tradability of a stock, the diversification benefits of a mutual fund, and, in most cases, really low expenses, ETFs can be a great tool for investors.
Energy investors have a number of ETF options for their portfolios. Today we'll look at Vanguard Energy , which Morningstar gives a four-star rating. The fund has a low expense ratio of 0.14%, with nearly all of its holdings dedicated to oil, exploration, production, refining, or transportation. Of the 169 companies the ETF holds, the top 10 make up nearly 60% of its total assets.
The fund's top holding is ExxonMobil , at a whopping 21.6% of net assets. That's not necessarily a bad thing, as Exxon is one of the world's largest publicly traded companies, with a market cap of nearly $400 billion. The oil giant trades for a reasonable 10 times earnings and pays a fairly decent 2.5% dividend. With integrated operations around the world, Exxon is an energy ETF in its own right. That's why if Exxon is already part of your portfolio, you might want to think twice before adding Vanguard Energy so that you're not overallocated to the global giant.
The fund's second largest holding is Chevron at 13.5%. After that, the allocations drop off dramatically, with Schlumberger coming in next at 5.8%. For those keeping score, that's 40% of the fund's assets in just three companies. Schlumberger does add some diversification to the mix, though, as the oilfield services giant isn't as exposed to the operational risks or commodity price fluctuations that come with being an oil major. Instead, Schlumberger, with operations in 85 counties, profits as a "pick-and-shovel" play.
Rounding out the top four is ConocoPhillips , which at one time was a major integrated oil company. It has since spun off its refining, midstream, and chemical operations into Phillips 66 , which also finds its way into the top 10 as the fund's ninth largest holding. Conoco makes up 4.4% of the fund's assets and is the first of five independents cracking the top 10, while Phillips 66 accounts for just 2% of the fund's net assets and is the lone refiner to make the top 10. Conoco adds one of the largest dividends to the fold, as its 4.5% yield is more than twice the 1.8% that the fund itself yields. Meanwhile, Phillips 66 adds a growing dividend, with exposure to midstream, chemicals, and, of course, refining.
When you buy Vanguard Energy, you're placing your bet on a rise in global energy demand. Instead of picking the one stock that'll outperform the market, you're placing your chips on the industry as a whole, though weighting that bet toward the largest companies. You'll need to consider whether you want more than 20% of your energy capital in Exxon while just 2% of it is in the refining power of Phillips 66.
Choosing the right ETF isn't easy these days. With so many options out there, investors can just as easily be burned by ETFs, so knowing which ones to invest in and which ones to bet against is important. Luckily, The Motley Fool's Pro service helps you profit on both sides of the trade. Pro's portfolio has owned Vanguard Energy in the past, but right now it has better ideas for how to make money in all markets. If you want help in using a combination of tools, including ETFs, to help grow and protect your portfolio, it might be time for you to Go Pro.
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The article Would This Energy ETF Be a Better Fit for Your Portfolio? originally appeared on Fool.com.Fool contributor Matt DiLallo owns shares of Phillips 66 and ConocoPhillips. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.