R E PORT
BY RONALD L. DELEGGE
Powering Portfolios With Energy ETFs
THE ENERGY SECTOR IS UNDERGOING
transformational changes that are al-
ready revolutionizing how we use trans-
portation, electricity and fuel power.
From an investment perspective, en-
ergy is a dynamic place for investors
and there are many exciting develop-
ments and trends taking place.
Among these: Growing domestic
production of both natural gas and
crude oil, which is reshaping the en-
ergy landscape. Also, new fracking and
technology are allowing the U.S. to ex-
ploit its natural resources and become
less dependent on importing energy.
Analysts foresee the following major developments within the U.S. and
global energy space taking place:
• Expansion of U.S. industrial pro-
duction over the next 10 to 15 years
due to the competitive advantage
of low natural gas prices used for
• Shifting away from more carbon-
intensive and dirty fuels such as coal
for electricity generation to cleaner
renewable energy sources
• Improvement in technology and ef-
ficiency of electric vehicles
Let’s examine major energy fo-
Alerian MLP ETF (AMLP)
Master limited partnerships (MLPs)
mostly operate energy infrastructure
like pipelines and aren’t taxed as cor-
porations. Although MLPs are some-
times thought of as fixed income invest-
ments, they have a growth component
AMLP is linked to the Alerian MLP
Infrastructure Index, which is a market
capitalization-weighted composite of 25
energy infrastructure MLPs that earn
the majority of their cash flow from the
transportation, storage and processing
of energy commodities.
Historically, the Alerian MLP index
has yielded around 3.22% higher versus the 10-year yield on U.S. Treasuries, according to Darren Horowitz at
Raymond James. That historical yield
spread is right in line AMLP’s 12-month
yield near 5.7%.
The gross expense ratio for AMLP
is 8.56%, which includes 7.71% for the
fund’s accrued deferred tax liabilities
plus 0.85% for management fees. AMLP
has around $9.5 billion in assets and
pays quarterly dividends.
Energy Select Sector SPDR ETF (XLE)
Although oil may seem like a stodgy
business, revolutionary changes in
crude oil production are taking place.
For example, growth in crude oil
production from tight oil and shale
formations, aided by technology ad-
vances, has supported a nearly fourfold
increase over the past six years, accord-
ing to the U.S. Energy Information
Administration (EIA) 2014 Annual
Energy Outlook. In 2008, tight oil
production accounted for just 12% of
total U.S. crude oil production com-
pared to 2012, when it accounted for
35% of total U.S. production.
Due to the highest spike in U.S. output since 1986, the supply glut of crude
oil has hit around 370 million barrels.
The energy sector represents 10.23%
of the S&P 500 and includes blue chips
like ExxonMobil, Chevron and Con-ocoPhillips. The 44 publicly traded
companies within XLE are primarily
engaged in crude oil production, exploration and drilling, along with natural
gas. XLE has over $11 billion in assets
and charges annual expenses of 0.16%.
SPDR S&P International Energy
Geopolitical concerns and the threat
of supply disruptions are always determining factors in crude oil prices. In
Iraq, most of crude’s production happens in the southern part of the country
where militant activity by radicals has
been limited compared to the north.
Libya’s largest oilfield resumed production, which has helped keep a lid
on worldwide oil prices.
Global consumption of crude oil
rose to a record high level of 90.4 million barrels per day in 2013. The EIA