Jeremy Poland
As I have noted in previous writings, I am broadly bullish on the energy sector. There is a significant lack of investment that will take years to correct, and demand for fossil fuels is not going away, no matter how much policymakers try to push the green agenda. Many agree With me, there are plenty of ways to take advantage of what I think may be years of tailwind. So how do you play it? Perhaps with a “smarter” approach. To that end, let’s take a look at the FirstTrust Nasdaq Oil & Gas ETF (Nasdaq:FTXN), which tracks the Nasdaq US Smart Oil & Gas Index, to determine if it is a smart index as the name suggests for energy bulls.
FTXN is an exchange-traded fund that attempts to track the performance of the Nasdaq US Smart Oil & Gas Index, a custom index An index consisting of US companies operating in the oil and gas industry. The ETF began trading in September 2016 and has assets of just over $217 million. The fund is completely passive. The NASDAQ methodology uses a multi-factor approach to selecting and weighting stocks. It sure looks smart.
Look at the holding
FTXN currently has 42 securities with a market cap ranging from $2.8 billion to $466.22 billion. When we look at the top holdings, we see overlap with many other energy sector ETFs. ExxonMobil ranks first. Although the position size seems somewhat heavy in terms of the top five, it actually seems a little less concentrated than other power funds I’ve seen out there.
ftportfolios
Sector configuration
The bulk of the holdings can be classified as crude oil producers, making up 42% of the fund. Next comes refining and marketing, followed by pipelines. This is generally extensive customization, and what you’d expect to see on a large scale.
ftportfolios.com
This exposure ensures that the box is not overweight in any one piece of the pie, reducing concentration risk, as well as taking advantage of the best features of both upstream and downstream production. By remaining upstream and downstream, FTXN encourages exposure to the entire value chain of the oil and gas industry that can add more value and stability to the bottom line.
Peer comparison
FTXN isn’t the only ETF poaching energy investor dollars. The Energy Select Sector SPDR ETF (XLE) is the big player here. XLE is designed to track the Energy Select Sector Index. When we look at the price ratio of FTXN to XLE, we see that overall, there does not appear to be any consistent outperformance. Overall, I’d say the two perform about the same.
StockCharts.com
Pros and Cons
On the positive side, the fund provides exposure to an industry that represents the bedrock of global economic growth and development. Routine energy demand is closely linked to the development potential associated with oil and gas, which capitalizes on the fact that much of the world’s population remains below the poverty line. Emerging economies continue to industrialize and urbanize. Moreover, the way the fund constructs its portfolio, using a multi-factor index, can provide more protection against idiosyncratic risks by focusing on companies that display the strongest combination of risk factors. On the downside, a recession could hit the sector hard if it happens globally, and there will be fits and starts of momentum depending on political pullbacks.
To invest or not to invest?
For investors looking for diversified exposure to an energy sector with heavy US components, FTXN is worth a closer look. But it doesn’t seem to add much outperformance compared to broad-based energy ETFs, which are larger. It seems possible that a multi-factor approach could lead to long-term outperformance, but this may be due to a preference for mid- and small-cap exposure over negative market cap weighted averages. Not a bad box at all, but I don’t know if it’s as smart as its name sounds. It’s really a function of preference versus something like the XLE in my opinion.
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