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Alex Kimani is a veteran finance writer, investor, engineer and researcher for Safehaven.com. 

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The Oil ETFs To Watch If The Iran Deal Crumbles


Back in April, we discussed the possibility of president Biden's administration reviving the 2015 nuclear deal with Iran and consequently lifting the country's oil sanctions. We surmised that whereas Iran rejoining the ranks of major oil exporters as early as 2021 after a three-year layoff was likely to cause quite a bit of trepidation in the jittery markets, such a move would not necessarily upset the delicate supply balance that OPEC+ has been trying to achieve.

Well, those concerns have just been pushed further down the road, with a floundering Iran nuclear deal pushing key oil and gas ETFs higher.

Oil prices fell nearly 3% last week after Iran's president, Hassan Rouhani, said that the United States was ready to lift sanctions on his country's oil, banking, and shipping sectors.

However, the speaker of Iran's parliament painted a much different picture on Sunday after announcing that a three-month monitoring deal between Iran and the U.N. nuclear watchdog had expired and that its access to images from inside some Iranian nuclear sites would cease.

Brent crude oil futures for July climbed nearly 2%, to $67.69 a barrel, while U.S. West Texas Intermediate (WTI) for July was up by a similar margin at $64.73 a barrel.

Meanwhile, key oil ETFs such as the VanEck Vectors Oil Service ETF (OIH) have been making strong moves after the latest development.

Is this only a temporary reprieve?

Analysts are saying the bull case remains intact whether or not Washington and Tehran ink a new deal.

"All in all, it seems to be only a matter of time before the sides involved put pen to paper on a new nuclear accord. Investors are bracing for a fresh wave of what will surely be heavily discounted Iranian crude," Stephen Brennock of oil broker PVM has declared.

However, Brennock says for all this alarmism, an aggressive ramp-up in Iranian production and exports is unlikely to stall the drawdown in global oil stocks.

Analysts at Goldman Sachs fully concur, saying that the case for higher prices remains intact even with increased Iran exports due to a vaccine-driven increase in global demand.

Given the ongoing bullish outlook, here are some key oil ETFs to consider for your portfolio.

#1 Energy Select Sector SPDR ETF (XLE)

      AUM: $24.3B

      Expense Ratio: 0.12%

      Dividend Yield: 4.0%

      YTD Returns: 37.5% With more than $24 billion in Assets Under Management (AUM), Energy Select Sector SPDR ETF (NYSEARCA:XLE) is the largest dedicated energy fund. Not surprisingly, it's also the most liquid and boasts a low expense ratio of just 0.12%, making it one of the cheapest oil ETFs to own.

Related: Oil Prices Rise At The Start Of Driving Season

XLE is designed to track the price and yield performance of companies in the Energy Select Sector Index. The index is, therefore, able to provide investors with broad exposure to companies in the oil, gas, and energy equipment industries. However, one of its significant shortcomings is that XLE contains just 26 stocks in its portfolio, with ExxonMobil (NYSE:XOM) and Chevron Corp. (NYSE:CVX) over-represented with weightings of 22.7% and 21.6%, respectively.

As of this writing, XLE is trading at $52.11 a unit.

#2 Vanguard Energy ETF (VDE)

      AUM: $4.1B

      Expense Ratio: 0.10%

      Dividend Yield: 3.42%

     YTD Returns: 40.2%

Vanguard funds are popular because they're cheap, and the Vanguard Energy ETF (NYSEARCA:VDE) has remained true to this ethos with an expense ratio of just 0.10%. It's also better diversified than XLE, with 97 stocks in its portfolio—albeit with less AUM.  Exxon and Chevron are still overrepresented, though, with weightings of 22.2% and 18.2%, respectively.

VDE tracks the performance of the MSCI US Investable Market Index (IMI)/Energy 25/50, an index consisting of stocks of large- and mid-cap US energy companies. VDE currently trades at $72.68 per unit.

#3 SPDR S&P Oil & Gas Exploration & Production ETF (XOP)

      AUM: $3.9B

      Expense Ratio: 0.35%

      Dividend Yield: 1.52%

      YTD Returns: 52.2%

SPDR S&P Oil & Gas Exploration & Production ETF (XOP) is an excellent ETF for investors who are not content settling for a vanilla fund that targets the obvious energy candidates, not to mention that it has been handily outperforming bigger ETFs such as XLE this year. The ETF invests in 53 energy exploration and production companies and is pretty well-diversified: Its top holding, Hess Corp. (NYSE:HES) commands a weighing of just 3.20%.

That said, diversification is not always what it's cracked up to be. XOP's high exposure to smaller energy companies can lead to extra-high volatility when the oil markets get choppy. One unit of XOP is currently changing hands at $89.04.

#4 VanEck Vectors Oil Services ETF (OIH)

      AUM: $985.0M

      Expense Ratio: 0.35%

      Dividend Yield: 0.90%

      YTD Returns: 39.0%

VanEck Vectors Oil Services ETF (NYSEARCA:OIH) is an energy fund that provides a different take on the Oil Patch by investing in oilfield services company stocks such as Schlumberger (NYSE:SLB), Halliburton Co. (NYSE:HAL), and Baker Hughes (NYSE:BKR) instead of integrated energy companies like Chevron and Exxon. 

OIH has a total of 26 oil services company stocks and generally enjoys strong liquidity. OIH is trading at $214.11-a-pop.

#5 VanEck Vectors Unconventional Oil & Gas ETF (FRAK)

      AUM: $17.4M

      Expense Ratio: 0.54%

      Dividend Yield: 1.01%

      YTD Returns: 56.9%

With AUM under $20 million, the VanEck Vectors Unconventional Oil & Gas ETF (FRAK) is one of the smaller oil and gas funds out there. However, that has not stopped it from outgunning its much bigger peers.

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, meaning shale companies are well represented.

The ongoing oil price rally has given a massive lifeline for U.S. shale companies hence their outstanding returns.

FRAK is currently changing hands at $120.01 per unit.

FRAK's top 10 holdings are:

  • Pioneer Natural Resources Co. (NYSE:PXD)--8.12%
  • ConocoPhillips (NYSE:COP)--7.20%
  • EOG Resources Inc. (NYSE:EOG)--7.18%
  • Devon Energy Corp. (NYSE:DVN)--6.14%
  • Hess Corp. (NYSE:HES)--6.06%
  • Occidental Petroleum Corp. (NYSE:OXY)--5.87%
  • Cenovus Energy Inc. (NYSE:CVE)--4.89%
  • Diamondback Energy Inc. (NASDAQ:FANG)--4.75%
  • Cimarex Energy Co. (NYSE:XEC)--4.65%
  • Tourmaline Oil Corp. (TSE:TOU)--4.59%

By Alex Kimani for Oilprice.com

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