HardAssetsInvestor

Written by Lara Crigger  |

July 09, 2010

Matt McCall: Sizing Up Energy ETFs

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Crigger: Certainly the euro crisis has played into this, by limiting the amount of money they're willing to spend on new initiatives.

McCall: I think we've priced in the worst of the worst in Europe. I'm a little optimistic on equities, generally, alternative energy being one of them, but I think we may have actually priced in the extent of the European financial crisis by now. In fact, we may have priced in worse than it's actually ended up being.

The thing is, when you're coming out of a recession, the first thing on the government's mind is not to go out and put new money into alternative energy fuel sources. And with everybody screaming austerity right now, I don't know if we're going to see the big subsidies coming out of European nations backing new wind farms, new solar plants. That is what concerns me in the near term.

Long term, though, I think you'll be fine, but you could have some dead money in these alternative energy ETFs for the foreseeable future.

Crigger: Let's talk a little about oil stocks. We've seen XLE [the Energy Select Sector SPDR ETF] outperform OIH [Oil Services HOLDRS ETF] in the wake of the spill. Why do you think this is?

McCall: Well, OIH had a lot of the drillers, so they got hit after the moratorium hard. A lot of people thought, if they're not going to do anymore deep-sea drilling, then these rigs aren't going to be operated. And some of the big holdings at OIH just happened in the gulf. So they took a hit immediately after that.

I think, longer term, OIH is probably the better play, the reason being they're not entirely dependent on just the Gulf of Mexico. They also have some ties with natural gas, so if we see the expansion of natural gas, you'll see the need for service companies as far as natural gas being the companies at OIH as well.

Crigger: Then what about XLE? Was the outperformance tied to the fact that XLE is not as concentrated in the gulf?

McCall: Yes. XLE's more the large-cap names: the Exxon-Mobil, the Chevrons of the world. They're more diversified, which is why they weren't hit as bad. Most of these companies do have some type of exposure to the Gulf, but it's a small percentage of their revenues, so you're not hit as hard. And that's the beauty of an ETF like that; you do have that diversification, so you don't take as big of a hit.

Crigger: What winners do you see in the energy space, looking forward?

McCall: We brought this up earlier, but I think the ones who will really benefit are the natural gas ETFs, like FCG [the First Trust ISE Revere Natural Gas ETF]. That will be probably one of the biggest beneficiaries, because a lot of the holdings in there will be U.S. shale plays. Whether it's the Marcellus shale or the Bakken shale, which has large amounts of natural gas, they're able to get that natural gas out of the shale at a decent price.

And I only think that the price of natural gas will increase, so that's going to help their bottom line. I think if anything comes out of this, that's going to be the biggest beneficiary.