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Tuesday, December 28, 2010

Oil ETF's or Oil Stocks a Better Investment ?

In his SEEKING ALPHA blog, 'Oil ETF vs. Oil Stocks? No Real Choice for Individual Investors', "TraderMark" cites the common problem of commodity ETF's, namely
they deal in contracts that must be rolled out each month and hence cause a lot of dislocations in price, and thus the investor does not get the bang for their buck.
An example is the popular United State Oil Fund (USO) :
...while crude oil is up some 14ish% for the year, USO has returned 0%. Hence, in this case there really is no choice in the "do I buy the commodity or the stock?" debate if you are not an institutional trader who has access to the commodity pit itself.
Even so, the blogger prefers purchasing ETF's rather loading up one's own basket of oil industry stocks. But which ETF's ? That is the question.
Now, not all ETFs are made the same and the oil space is no different -- many times you will see ETFs top loaded with the big boys like Exxon (XOM), Chevron (CVX) and a few other huge integrated companies. Rather than go that route, a far more inclusive ETF would be something like SPDR S&P Oil & Gas Exploration & Production (XOP)... [XOP] is not concentrated in a few mega cap names, and indeed the top 10 holdings only make up one-third of the entire portfolio. You even have some refiners thrown into the mix for a truly broad exposure to the sector. XOP is also liquid with some 3.6 million units trading each day, unlike many other sector specific ETFs.

For information on XOP's performace as of 11/30/2010, click here.