Energy Index - opinions sought

[Maurice]

I'm thinking of adding an energy index ETF to my AA model in the coming year. To date I have only broad indices with the exception of one sectoral bet on US healthcare. I'm thinking of adding a second sectoral bet using a small amount of my equity allocation.


The question is - which index?

Vanguard, always my first choice when other things are equal, has an energy index ETF that tracks the MSCI US Investable Market Energy Index. THis is certainly a decent choice and has obviously done quite well for the past several years.

But I don't love the fact that its US based. Sure that picks up most of the majors, but theres something to be said for not excluding the big-name non US players, e.g. Shell, Total, BP, etc. I think that is especially true since there are a number of countries with lots of energy resources which prefer to contract with non-US companies.

So the other option I'm looking at is IXC, the Barclay's ETF that tracks the S&P Global Energy Sector Index fund.

Of course thats a more expensive fund - both because Barclays is generally more expensive than Vanguard, but also because its more expensive to license an S&P index than an MSCI index. It has also marginally underperformed the Vanguard fund historically.

Hence the purpose of this thread. When you folks look into your crystal balls, do you see additional returns generated by the international components compensating for the premium one would pay for the international index?

Alternatively, is there another international energy index fund out there I'm missing that's cheaper than the Barclays offering?

 

[CybrMike]

Hmm energy when oil is $92 Barrel. Chasing performance? Might be right but I'd feel a whole lot better if I was buying in before a big run-up instead of after. Oh, and I'd go for international. Rather be paid in a currency thats not dropping like a rock.

 

[Maurice]

Hmm energy when oil is $92 Barrel. Chasing performance?

For me this is a two or three decade long play. Oil hasn't even started to get expensive yet.

Oh, and I'd go for international. Rather be paid in a currency thats not dropping like a rock.

I'm not sure I follow the logic here. There's a single international market for oil, and its priced in dollars, so top-line performance measured in dollars should be unaffected by home county. If anything, in a falling dollar environment US companies should have a bottom-line edge since more of their expense base is in dollars than their European competitors.

My interest in exposure to non-US companies is more a question of access to existing reserves over the next decade or two.

 

[haha]

My interest in exposure to non-US companies is more a question of access to existing reserves over the next decade or two.

Reserves are getting very tricky. Most of the reserves these multinational oils own are in decline; the big reserves are mostly owned by countries and national oil companies now.

It is a complex area, but I have exposure in three parts- E&P(mainly North American natural gas and some oil sands); North American pipelines and gathering and storage and processing of gas, gas liquids, and refined products; and oil and gas service.

The producers are always the ones that get royalties increased on them, or the application of windfall profits taxes or similar. On the other hand, getting the stuff out of the ground, or conditioning and delivering it seem generally to be spared from tax-attack. Also, many service companies are international. If the Gulf of Mexico is getting drilled out, they just move to Saudi Arabia, the Persian Gulf, Russia or wherever there is demand for their services.

IMO, right now North American land drillers-which mostly means gas drillers- are cheap. There are all kinds of good reasons for this, but I believe they are the kinds of reasons that evaporate as soon as the stocks start climbing. These land drillers tend to be very conservatively financed and run by people who are used to hunkering down to survive lean times. Given a little patience, it would be hard not to double the money you invest in this area.

From time to time other oil service areas get cheap. There is always a reason but usually this is a very fluid area- what is up goes down, what is down goes up. Very important to look at balance sheets carefully, not just the summaries on Yahoo or whatever, because you are buying something that is being rejected by people who are not dumb, but who may have different time constraints from you as an individual investor. You want to be sure that your pick can survive the lean times.

The big risk is a near term recession. A lot of natural gas is used in industrial processes, so demand would drop at least to some degree.

Ha

 

[Maurice]

Did some more research, posting an answer to my own question for posterity. Unlike the Vanguard ETF (VDE), the Vanguard mutual fund (VGENX) contains some foreign holdings, both ADRs and foreign-listed shares. Thus I can get the international exposure and the low expense ratio of vanguard. All is right with the world!

 

[ls99]

Hmm energy when oil is $92 Barrel. Chasing performance? Might be right but I'd feel a whole lot better if I was buying in before a big run-up instead of after. Oh, and I'd go for international. Rather be paid in a currency thats not dropping like a rock.

At the risk of resurrecting an old thread. Have not figured out how to start a new thread from old.

Am cogitating re-balancing, first time in a few years. In the process of looking over some historic opinions I found this comment interesting. It was a reply to Maurice.

 

[TromboneAl]

Maurice, tell us how much you bought last year, and how much you've made so far.

 

[CybrMike]

Yeah. Like the famous quote goes, the market can stay irrational longer than you can stay solvent.

 

[Moemg]

I bought VGENX in 1986 and I've averaged 15.6 % .

 

[kumquat]

Try XIU-TO. It's not entirely energy but the bulk of it is. The rest are commodities such as potash, uranium, gold, other mineral, banks/insurance and 1 tech company. Also gives you some currency hedging.