ETF Trends CEO Tom Lydon discussed the VanEck Vectors Unconventional Oil & Gas ETF (FRAK) on this week’s “ETF of the Week” podcast with Chuck Jaffe on the MoneyLife Show.
FRAK seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the MVIS Global Unconventional Oil and Gas Index, which is intended to track the overall performance of companies involved in the exploration, development, extraction, and/or production of unconventional oil and natural gas.
With oil and energy being on opposite sides, and each having their issues, Jaffe’s clear question is about what makes FRAK viable. As Lydon explains, energy and oil, in the past five years, has not been doing well. Recently, however, the U.S. has become more self-sufficient with oil needs. With that in mind, investors looking to diversify in areas that have previously underperformed are coming up with strategies.
Oil specific to the U.S. seems to be an excellent way to go, as far as tapping into it as a potentially useful market. With that in mind, while FRAK is not above its 200-day average, there’s a long term play in mind, thanks to the chance being taken on that oil potential.
Won’t FRAK Up The Portfolio
When putting FRAK into the context regarding portfolios, diversifying with this fund means there will be some sector crossover, but not with the big classic oil companies. Jaffe wonders where the money is getting pulled from.
Lydon states, “What FRAK does is focus specifically on North America. The U.S. is 82% of the portfolio. Canada is a little over 17% of the portfolio. What FRAK does is preserve the allocation to a certain sector, but also a certain region. Are you going to go in and take out the national energy companies out of your mutual fund or S&P allocation? No, but what I think we’ll see down the road is more that will cut back on their overall diversified allocation.”
He continues, “And as opportunities come to the surface, we’ll see investors start to put higher allocations to certain sectors or themes, which can be done today with ETFs, because of all the opportunities.”
Lydon is clear-minded enough to acknowledge FRAK will not be the best oil or energy ETF available, but from a fundamental standpoint, the price is right, and the increase in concentration in the U.S. will help. Additionally, being more energy independent means being less concerned with production outside the U.S.
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Jaffe, shifting gears to headline news, will affect the oil sector, wants to know how FRAK will play in regards to the 200-day moving average. Lydon notes how the more specialized, the more susceptible the market is to volatility, or it will have its own trends. By following the 200-day average on FRAK, if things go to plan and everything returns to the mean, it will participate.
“It’s a great example of what ETFs can offer in a thinly sliced area of the world,” Lydon states. “It’s amazing what technology has brought regarding fracking today, and it’s going to get that much better in the U.S.”
Hear Tom Lydon Discuss the Benefits of FRAK:
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