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Wednesday, October 24th, 2012
energy plays

The Wall Street Journal had a nice four-page section yesterday on ETFs, anticipating the twentieth anniversary in January of the SPDR S&P 500 (SPY).

One of the articles talked about the difficulties in picking an ETF given the number of them available in many investment categories.  Accompanying the article was a table showing the different attributes of five energy stock ETFs.

The returns for those funds since May of 2007 (the period during which they all have been trading) are shown above.  You can see that the spread of performance has been about twenty percent over that time.

The expenses range from 0.17% to 0.70% and, perhaps not surprisingly, the low fee ones did the best and the high fee ones the worst.  The holdings vary considerably, so it’s important to look at exactly what you are getting whenever you have similar ETFs.

Other than the differences in holdings, the funds aren’t very diverse in terms of methodology.  Four of the five are weighted by market capitalization — FXN uses fundamental attributes — and all fully replicate the underlying index rather than use some other strategy.

The top line in the chart is nearby oil futures.  During this time period, the correlation between XLE and crude was +.61.  Since its inception in 1998, it has been +.50.  But in the early years, the trailing 120-day correlation went substantially negative a few times.  With the increased correlation over time between stocks and oil, that hasn’t happened since 2004.

Increasingly, financial advisors are getting into the game of analyzing these clusters of ETFs and choosing a favorite — or perhaps rotating among them — as part of an exploding business called “managed ETFs.”  The temptation will be, as it always is, to focus on recent performance in deciding which ETFs or which “managers” of them are best.  In such a way will many selection errors be made.  (Chart:  Bloomberg terminal.)