IXC: Can iShares S&P Global Energy shine in difficult markets?

June 13, 2008 - PRLog -- For much of this past year, iShares S&P Global Energy has lagged the three other energy-focused iShares ETFs, both in performance and on Don Dion’s ETF Momentum Tracker Sector Momentum Table. In the past two weeks, however, IXC has joined IYE, IEZ, and IGE to round out the top 6. http://www.fidelityadviser.com/readMe_ETF.asp.
Dion is the publisher of ETF Momentum Tracker, and the family of newsletters to which it belongs. Fidelity Independent Adviser, the flagship newsletter, was recently ranked among Mark Hulbert’s top ten for risk-adjusted performance at MarketWatch. http://www.fidelityadviser.com/.
   IXC currently sits in the 6th spot and has fluctuated between No. 6 and No. 10 in the last three months, while iShares Dow Jones Oil & Gas Exploration (IEO), Oil Equipment (IEZ) and Energy (IYE) sit in the top three.
   Of course, IXC has by no means been left out of the energy sector’s long run-up; its global construction—nearly half its assets are in foreign stocks, and it strongly emphasizes typically more stable, giant-cap stocks—means it could maintain momentum if foreign stocks take the lead from their U.S. counterparts.
   With BP, Total, Royal Dutch Shell, Eni, BG Group, Petrobras and EnCana among its top 15 holdings, IXC stands apart from the typical energy fund. In fact, though ExxonMobil—whose stock has struggled recently (down over 4% year to date through June, 9) because of sky-high expectations—is the longtime and recent top holding, it accounts for less than 15% of assets, compared to 23% for Dow Jones Energy. Add in Chevron, which accounts for 14.6%, and more than 37% of IYE’s assets are held in two stocks.
   IXC, on the other hand, recently had Royal Dutch Shell, with investments in two share classes, as their second largest holding at about 7.5%. Chevron and Exxon combined make up less than 20% of IXC’s current portfolio.*
   The fund recently boasted an average market capitalization of $104 billion, with nearly three quarters of assets in stocks described by Morningstar as giant-cap and nearly 98% classified as giant- or large-cap. Dion cautions however that while “the weighting makes the fund a bit less volatile than its peers, its three-year standard deviation of 19.93 more than doubles that of the S&P 500.”
   “IEO, IEZ, and IYE have all outperformed year to date,” Dion noted “this might be a good indication that IXC has more room to run.” Year to date, Energy (IYE) is up 8.35%, Oil & Gas Equipment (IEZ) 16%, and Oil & Gas Exploration (IEO) 22.38% through June 9th.
   Dion cites his “exposure to natural resources funds through the iShares GSCI Commodity-Indexed Trust and Dow Jones Basic Materials (GSG)”, as the reason he doesn’t currently hold any of the energy-focused ETFs in his ETF Momentum Tracker portfolio. http://store.fidelityindependentadviser.com/etf1yr.html.
   One of the things that makes those broader funds more attractive than this one—and the other energy-focused funds—is that while GSG and IYM offer exposure to oil, they’re more diversified and therefore not tied solely to oil prices.
   Energy funds tend to move up and down with oil prices, which explains their laudable returns in recent years as oil prices quadrupled. The iShares energy ETFs have posted an average one-year gain of 35.7%, but GSG is up 66.7% over that period.
   U.S. crude hit a new record high of $138.54 per barrel on Friday, and last week brought a wave of predictions that it could hit $200 in the coming months. Oil slid $4, however, in trading Monday, as both political and international players expressed concern over record prices.
   Early Monday, Iyad Madani, Saudi Arabia’s Information and Culture Minister called for a summit between oil’s top producers, telling the Associated Press that “there is no justification for the current rise in prices.”
   In a research note Monday, analyst Stephen Schork warned that the oil market was being driven by “mania,” and that “when the bubble pops, this mania will end the same way all manias before it did, i.e. crashing and giving back all of the accrued gains.”
   Finally, as Election Day draws closer, investors face different outcomes as the candidates shore up their solutions. While Obama says he would tax oil companies, and McCain speaks of eliminating the federal gas tax, both plans are expected to include a reduction in greenhouse gasses. That said, as the political race nears the final stretch, the future of oil may be as uncertain as ever.
   For investors in an energy or oil ETF, the first step to success will be to understand the strategy that drives allocation decisions in the underlying portfolio. Expert opinions, like those found in Dion’s ETF Momentum Tracker, can empower the investor with information during market swings. http://store.fidelityindependentadviser.com/etf1yr.html.   Sticking with an ETF that is arguably more diversified, like IXC, might also help to buoy investors through the market’s volatile waters.

Performance

Period  NAV Return (%)   +/- Category*
YTD**   8.47     -4.99
2007  30.40     -2.37
2006  20.89     +6.00
2005  28.79     -6.44
2004  27.88     -3.52

*Category: Natural Resources
**Through 6/6/08
Source: Morningstar

Top Ten Holdings*         Weighting                        Ticker
ExxonMobil             13.74%                    
BP                 6.36%                      
Chevron                                    6.12%                      
Total                  5.93%                      
Royal Dutch Shell-A                                    4.33%                      (NYSE- RDS-A)
ConocoPhillips                                    4.27%                      
Schlumberger                                     3.62%                      
Royal Dutch Shell-B                                    3.29%                      (NYSE- RDS-B)
Eni                  3.01%                      
Petroleo Brasileiro S.A.-ADR                         2.73%                      
*As of 6/6/08
Source: iShares.com   

About Don Dion:

About Don Dion:
Don Dion is the publisher of the Fidelity Independent Adviser family of newsletters, which provides to a broad range of investors Don’s commentary on the financial markets, with a specific emphasis on mutual funds and exchange-traded funds. With more than 100,000 subscribers in the United States and 29 other countries, Fidelity Independent Adviser publishes six monthly newsletters and three weekly newsletters. Its flagship publication, Fidelity Independent Adviser, has been published monthly for 11 years and reaches 40,000 subscribers. http://www.fidelityadviser.com/

Mr. Dion is also president and founder of Dion Money Management, a fee-based investment advisory firm to affluent individuals, families and nonprofit organizations, where he is responsible for setting investment policy, creating custom portfolios and overseeing the performance of client accounts. Founded in 1996 and based in Williamstown, Massachusetts, Dion Money Management manages more than $770 million in assets for clients in 49 states and 11 countries. A licensed attorney in Massachusetts and Maine, Mr. Dion has more than 25 years’ experience working in the financial markets, having founded and run two publicly traded companies before establishing Dion Money Management. http://www.dionmm.com/

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Fidelity Independent Adviser is a family of newsletters, that provides to a broad range of investors Don Dion’s commentary on the financial markets, with a specific emphasis on mutual funds and exchange-traded funds. With more than 100,000 subscribers in the United States and 29 other countries, Fidelity Independent Adviser publishes six monthly newsletters and three weekly newsletters. http://www.fidelityadviser.com/