Exchange Traded Funds
Traded on most of the larger exchanges, Exchange Traded Funds or ETFs offer an advantage to placing ones’ money into a standard mutual fund or IRA.
Active trading creates a potential for growth, but also poses risk for the investor. Funds participate in the market by purchasing shares of market indexes like S&P, MSCI and Dow Jones.Offered by seven fund families, energy sector ETFs purchase shares of indexes that invest in energy exploration and production. Some of these funds purchase those portions of larger market indexes that deal with energy exploration and production. Other funds will invest in sub-sectors of large oil and gas indexes, and a few will choose oil futures and options. Each fund has a unique approach to best replicate the growth of stocks and indexes in the market’s energy sector.
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The Vanguard fund employs an indexing approach where the weights of assets are adjusted so that performance matches that of an index. The fund replicates the MSCI US Investable Market Energy Index by investing all of its assets in the stocks that make up the index.
United States Oil will invest in futures contracts for crude oil, heating oil and other petroleum based fuels traded on the exchanges.
SPDR replicates the return of sub-industry portions of S&P’s total market index. Two separate ETFs follow equipment, services, exploration and production.
PowerShares invests in companies involved in exploration and production of energy. In pursuit of its objective the fund may invest at least 90% of total assets in common stocks that comprise the Energy Exploration & Production Intellidex index DWE. This is an Index designed to identify stocks within the energy exploration and energy production industry that have capital appreciation potential.
Oil Service HLDRs seeks to diversify investments in the oil industry through a single exchange-listed instrument representing undivided ownership of underlying securities. The investment owns shares of common stock issued by specified companies, that, when initially selected, were involved in the oil service industry. This is identical to owning shares of an oil index.
The iShares IGE fund seeks investment results that correspond generally to the price and yield performance of the Goldman Sachs Natural Resources Sector index. The fund invests at least 90% of assets in the securities of its underlying index.
It should be noted that because sector ETFs are non-diversified, assets are concentrated in fewer individual holdings and invested in firms that fall into a specific industry and entail additional risks and volatility. This creates susceptibility to financial, market and economic events affecting the issuers and the industry sectors in which they invest.
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