Get Smart About Energy With a Smart Beta ETF

The energy sector is one of the best-performing sectors in the S&P 500, but as seasoned energy investors well know, conventional ETFs offering exposure to the oil stocks are cap-weighted and heavily allocated to a small amount of companies.

Investors looking for a different approach to the energy patch can consider smart beta funds, including the First Trust Energy AlphaDEX Fund (NYSEArca: FXN). FXN’s holdings are selected based “on growth factors including three, six and 12-month price appreciation, sales to price and one year sales growth, and, separately, on value factors including book value to price, cash flow to price and return on assets,” according to First Trust.

“First Trust Energy AlphaDEX’s performance has roughly correlated with the price of U.S. crude, and both are up almost the same in 2018. The connection to oil prices is a big reason why the ETF has underperformed in the long term. Through the end of March, the ETF was down 10.8%, 7.3% and 3.6% in three-, five- and 10-year periods,” reports Investor’s Business Daily.

Oil’s Global Supply Glut

A combination of diminished global output and rising global demand have helped reduce the global supply glut that dragged on oil prices for years. Production cuts from the Organization of Petroleum Exporting Countries and their allies have largely contributed to the cut in supply. Meanwhile, expanding economies around the world has bolstered demand for raw materials such as crude oil.

Related: Looking to Smart Beta ETFs as Rates Rise

FXN holds 48 stocks with a median market value of $11.90 billion, well below the typical average market values seen on cap-weighted energy ETFs. None of FXN’s holdings command weights of more than 4.83% and Exxon Mobil Corp. (NYSE: XOM) and Chevron Corp. (NYSE: CVX) are not among the fund’s top 10 holdings. Conversely, the two largest U.S. oil companies often represent 30%, 35% or more of cap-weighted energy funds.

“The $389.6 million fund has about a 9% gain for the year, and it is finding support in a pullback to the 50-day moving average. This leaves shares in a buy area, one in which it’s best to buy as close as possible to the 50-day average (now around 16.30),” according to Investor’s Business Daily.

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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.