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:
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
Shifting away from more carbon-intensive and dirty fuels such as coal for electricity generation to cleaner renewable energy sources
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%.
First Trust ISE Revere Natural Gas ETF (FCG)
Gas inventories climbed 1.887 trillion cubic feet from an 11-year low in March to 2.709 trillion on Aug. 29, 2014 the fastest pace for the period in EIA data going back to 1994.
U.S. gas production is rising toward a fourth straight annual record as new wells come online at shale deposits. And the EIA estimates that by 2035 natural gas will surpass coal as the nation’s largest source of energy for electricity generation.
FCG follows a basket of 30 U.S. natural gas stocks that are equally weighted. The fund has around $500 million in assets and charges annual expenses of 0.60%.
Market Vectors Coal ETF (KOL)
Globally, coal remains a dominant source of power generation. Despite increasing competition from other resources, coal is plentiful and inexpensive.
In the U.S., coal still plays an important role for generating power. But the increased usage of alternatives like natural gas and cleaner renewable energy sources is rapidly chipping away at this dominance.
How poorly have coal stocks performed? From 2011 to 2013, KOL recorded three consecutive yearly losses and over the past five years KOL has erased 5.81% in value. The $190 million fund has a 2.60% SEC yield and its annual expenses are 0.59%.
“Coal has a long list of drawbacks. But its advantage lies in its price, which is far cheaper than other sources of fuel,” said Zacks Equity Research.
Market Vectors Uranium Nuclear Energy ETF (NLR)
In 2012, coal-fired and nuclear power plants together provided 56% of the electricity generated in the U.S. The role of these technologies in the U.S. generation mix has been changing since 2009, as both low natural gas prices and slower growth of electricity demand have altered their competitiveness relative to other fuels.
Although nuclear power plants are expensive to build and maintain, they have relatively low variable operating costs, which ensures that they are dispatched when available.
Perhaps the biggest worries facing the nuclear industry are environmental issues, safety and new regulatory burdens in light of the Fukushima nuclear disaster. In 2013, Dominion Energy estimated post-Fukushima changes would cost $180 to $240 million for its fleet of six nuclear power plants.
NLR owns stocks in the global nuclear sector from Australia, Japan, France, Canada, Poland and the U.S. The fund has $76 million in assets and charges 0.60% annually. In 2013, NLR gained 17%.
The overall trend in energy is toward relatively clean and renewable sources like natural gas, solar and wind. Likewise, the U.S. is making a major push toward increasing domestic production of natural gas and oil to reduce dependence on trading partners.
Sector energy ETPs allow you to focus on major investment themes without having to select individual companies. Besides full transparency, it’s a more diversified approach and an outstanding way to capitalize on the dynamic shift happening in the energy sector.