Market Vectors Launches Unconventional Oil and Gas ETF (FRAK) - ETF News And Commentary
February 17 2012 - 2:17AM
Zacks
Van Eck, the issuer behind the Market Vectors brand name that
has brought investors a variety of country and sector specific
ETFs, is back at the product development front again with more
expansion in the energy space. In the latest release, the company
launched an Unconventional Oil and Gas ETF which
trades under the clever ticker of FRAK (as in
fracking, a popular technique used by many in the industry to
extract hydrocarbons from the ground). With this focus, the fund
looks to give investors exposure to an index of companies engaged
in the coalbed methane, coal seam gas, shale oil, shale gas, tight
natural gas, and tight oil sands segments, only investing in firms
that are primarily devoted to this corner of the energy
industry.
FRAK Holdings
In total, FRAK charges investors 54 basis points a year in fees
while holding 44 securities in total, putting the vast majority of
its assets in the U.S (71%), although Canadian firms make up just
over 28.5% of the product as well. Despite the concentrated nature
of the fund and the relatively specialized industry focus, the
product is heavily tilted towards large caps as medium and small
market capitalization firms make up less than 17% of total assets.
In terms of top individual holdings, Occidental Petroleum
Corp (OXY),
Canadian Natural Resources
(CNQ), and Eog
Resources (EOG) take the
top three spots, accounting for a combined 23.5% of the fund (also
read Inside The Forgotten Energy ETFs).
Unconventional Oil & Gas Industry
Thanks to impressive technological advances and relatively high
oil prices, many oil and gas firms are able to tap into a variety
of once overlooked hydrocarbon deposits. These forgotten zones were
known to contain fossil fuels but due to low prices and poor
technology, they were unable to be recovered. This has been
changing in recent years as hydraulic fracturing has helped to
loosen these deposits while advances in horizontal drilling have
allowed these finds to be brought up to the surface. Thanks to
these trends, oil and gas production has undergone a boom in a
variety of markets ranging from the U.S. and Canada, to South
America, Europe, and East Asia (see Time To Consider The Small Cap
Oil ETF).
These techniques are also gaining in popularity as a way for
countries to make themselves more energy independent or to increase
exports to resource hungry markets around the globe. This is
especially important in traditionally resource poor regions which
are finding out that they might be holding onto significant
reserves that can help to boost economic development at this
uncertain time. Furthermore, the trend could also be good from an
M&A perspective, as large integrated oil and gas firms grow
more desperate for new reserves. In fact, many integrated oil
companies are finding themselves shut off from key growth markets
around the world as state-owned or partially state-owned integrated
oil firms dominate these new oil producing regions. As a result,
the unconventional oil and gas boom could see added interest from
potential buyers looking to beef up their technical expertise and
access new and relatively untouched fossil fuel supplies (see more
on FRAK’s PDF on the fund’s home page).
Risks of the sector
The biggest concern that investors should have when taking a
look at this sector comes from an environmental perspective. There
is growing concern over how these techniques and the relatively new
technologies impact water supplies in the regions. Of greatest
worry is how some of the chemicals used in the process stay in the
earth and if this can impact groundwater and render it undrinkable.
As a result of this, as well as a variety of bad press from many
groups, some are looking to ban certain types of fracking until
more is known about the process. If this trend becomes more
widespread or more environmental concerns hit the market, the boom
in unconventional oil and gas could quickly peter out (read Forget
WTI, Play Crude With This Oil ETF).
Nevertheless, if these environmental concerns can stay on the
backburner, investors could see strong growth in this sector for
the foreseeable future. This could be especially true if commodity
prices remain relatively high or if the U.S. economy looks poised
to take further advantage of the vast supplies of natural gas at
its doorstep. If investors are believers in these trends, FRAK
represents an interesting choice. Since it is relatively
diversified, single company issues aren’t likely to weigh on the
product too heavily, allowing investors to play off of the trend
from an industry perspective. While this could reduce the overall
return, it looks to keep risks to a minimum as well, suggesting
that it could be an interesting choice for those who wanted more
exposure to the segment but are concerned that new environmental
rules could weigh down a few bad apples in the bunch (read Is Now
The Time To Buy Russia ETFs?).
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CDN NTRL RSRCS (CNQ): Free Stock Analysis Report
EOG RES INC (EOG): Free Stock Analysis Report
OCCIDENTAL PET (OXY): Free Stock Analysis Report
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