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September 29, 2014 at 08:00 PM
The energy sector is undergoing transformational changes that are already revolutionizing how we use transportation, electricity and fuel power. From an investment perspective, energy is a dynamic place for investors and there are many exciting developments and trends taking place.
Among these: Growing domestic production of both natural gas and crude oil, which is reshaping the energy landscape. Also, new fracking and technology are allowing the U.S. to exploit its natural resources and become less dependent on importing energy.
Analysts foresee the following major developments within the U.S. and global energy space taking place:
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Expansion of U.S. industrial production over the next 10 to 15 years due to the competitive advantage of low natural gas prices used for industrial output
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Shifting away from more carbon-intensive and dirty fuels such as coal for electricity generation to cleaner renewable energy sources
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Improvement in technology and efficiency of electric vehicles
Let’s examine major energy focused ETPs.
Alerian MLP ETF (AMLP)
Master limited partnerships (MLPs) mostly operate energy infrastructure like pipelines and aren’t taxed as corporations. Although MLPs are sometimes thought of as fixed income investments, they have a growth component unlike bonds.
AMLP is linked to the Alerian MLP Infrastructure Index, which is a market capitalization-weighted composite of 25 energy infrastructure MLPs that earn the majority of their cash flow from the transportation, storage and processing of energy commodities.
Historically, the Alerian MLP index has yielded around 3.22% higher versus the 10-year yield on U.S. Treasuries, according to Darren Horowitz at Raymond James. That historical yield spread is right in line AMLP’s 12-month yield near 5.7%.
The gross expense ratio for AMLP is 8.56%, which includes 7.71% for the fund’s accrued deferred tax liabilities plus 0.85% for management fees. AMLP has around $9.5 billion in assets and pays quarterly dividends.
Energy Select Sector SPDR ETF (XLE)
Although oil may seem like a stodgy business, revolutionary changes in crude oil production are taking place.
For example, growth in crude oil production from tight oil and shale formations, aided by technology advances, has supported a nearly fourfold increase over the past six years, according to the U.S. Energy Information Administration (EIA) 2014 Annual Energy Outlook. In 2008, tight oil production accounted for just 12% of total U.S. crude oil production compared to 2012, when it accounted for 35% of total U.S. production.
Due to the highest spike in U.S. output since 1986, the supply glut of crude oil has hit around 370 million barrels.
The energy sector represents 10.23% of the S&P 500 and includes blue chips like ExxonMobil, Chevron and ConocoPhillips. The 44 publicly traded companies within XLE are primarily engaged in crude oil production, exploration and drilling, along with natural gas. XLE has over $11 billion in assets and charges annual expenses of 0.16%.
SPDR S&P International Energy ETF (IPW)
Geopolitical concerns and the threat of supply disruptions are always determining factors in crude oil prices. In Iraq, most of crude’s production happens in the southern part of the country where militant activity by radicals has been limited compared to the north. Libya’s largest oilfield resumed production, which has helped keep a lid on worldwide oil prices.
Global consumption of crude oil rose to a record high level of 90.4 million barrels per day in 2013. The EIA expects global oil demand to increase by another 1.1 million barrels per day this year. Nevertheless, crude oil supply will outpace consumption growth and increase by 1.5 million barrels per day in 2014.
Top holdings within IPW include BP, Royal Dutch Shell and Suncor Energy. IPW gained around 11% over the past year and charges annual expenses of 0.50%.
