If You Want Energy Exposure, Focus on Integrated Oil ETFs

Some may see a buying opportunity in the energy space after the sell-off. If you have a strong conviction on the sector outlook, try sticking to integrated oil companies and related exchange traded funds.

“We prefer integrated oil companies within the energy sector,” Russ Koesterich, Global Chief Investment Strategist and Head of the Model Portfolio & Solutions Business at BlackRock, said in a research note. “Although oil prices have firmed, the global energy sector has not. Hence, investors may consider the world’s largest oil and gas companies for their cheap valuations, relatively lower sensitivity to oil price swings, deeper pockets and potentially high dividend yield.”

These integrated energy companies have operations in exploration, production, refinement and distribution of oil and gas. Due to their diversified operations across upstream and downstream businesses, these integrated companies are more capable of weathering changes in oil prices.

For instance, the iShares U.S. Energy ETF (NYSEArca: IYE) tracks some of the largest energy companies, including Exxon Mobile (NYSE: XOM) at 21.7% of the overall portfolio, along with Chevron Corp. (NYSE: CVX) 11.4%, Schlumberger (NYSE: SLB) 6.7% and ConocoPhillips (NYSE: COP) 4.7%.

Similarly, the Energy Select Sector SPDR (NYSEArca: XLE) and Vanguard Energy ETF (NYSEArca: VDE) are both close alternatives that offer exposure to the domestic energy sector, with an emphasis on the largest names in the space.

After the drop off in oil prices, the sector ETFs have also retreated and may offer a more attractive entry point. Over the past year, IYE fell 25.0%, XLE declined 24.1% and VDE decreased 25.5%.

“After the beating it took amid plunging oil prices, energy looks like the cheapest sector,” according to Morningstar analyst John Gabriel, pointing to the S&P 500 Energy Sector’s low price to fair value.

The larger integrated oil companies are more flush and have a larger war chest to draw upon when times get tough. While big oil has cut stock repurchase plans to save cash, many bigger players have not gone so far as to cut back on dividends. For instance, Exxon and Chevron have exhibited a long standing history of steadily increasing dividends and remain so-called dividend aristocrats. [Oil ETF Dividends Appear Safe…Sort Of]

The energy sector ETFs also offer somewhat decent yields. IYE has a 2.54% 12-month yield. XLE has a 2.65% 12-month yield and VDE hs a 2.07% 12-month yield. According to BlackRock, the energy sector has the third highest dividend yield, behind telecom services and utilities.

For more information on the energy sector, visit our energy category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.