How to Build an Energy Bull ETF Portfolio

By Commodity HQ  SEP 19, 2012 11:10 AM

For those who can stomach the risk, allocations to energy can certainly pay off as demand continues to grow across developed and emerging markets alike.

 


Establishing exposure to the energy sector is by no means for the faint of heart. Positions in this corner of the commodity universe are ripe with risk and are often times associated with high volatility. But for those who can stomach the risk, allocations to energy can certainly pay off as demand continues to grow across developed and emerging markets alike.

Investments in this sector can also be used as tactical tool to hedge against inflation, since increases in the price of commodities like oil and gas prices tend to ripple across the economy. For those who wish to establish a tactical tilt towards the energy sector,  we outline an all ETF portfolio that is designed to give well-rounded exposure to multiple segments of the energy market

Portfolio Snapshot

First things first, here are the ETFs that we have chosen for this particular portfolio.



As can be seen above, there is really only one fund that is unrelated to the commodity industry. And although GSP is the only fund that invests directly in commodities, the other equity ETFs offer exposure to both domestic and international energy producers.

Holdings Overview

Below is a brief overview of each component of this portfolio.


Historical Return Analysis

The adjacent table provides historical results for each component of this portfolio, as well as backtested results (as available) for the entire portfolio during 2008, 2009, 2010, and 2011. The table also shows how this portfolio performed relative to a popular stock market benchmark (SPY) and bond benchmark (AGG).

It is important to note that many of the ETFs used in this portfolio have relatively short operating histories, limiting the extent of valuable historical return analysis.

Many equity and commodity ETFs in this portfolio suffered significant losses in 2008, as the global recession hammered equity and energy prices around the world. It is worth noting, however, the remarkable performance of KOL, which gained over 100% in 2009. As the energy industry continues to recover, many of these funds have been able to make up previous losses, while some have greatly outperformed the broad stock market, as represented by SPY.

Portfolio Expenses

This portfolio is designed for long-term use consistent with a “buy, hold, and rebalance” strategy. As such, minimization of expenses is necessary to avoid return erosion resulting from compounding costs. To this end, we constructed a portfolio with a weighted-average expense ratio of 55 basis points, which is significantly lower than fees charged by actively-managed mutual funds, which can exceed 1.0%. The impact of this reduced cost structure over a 30-year time horizon is significant.



While this can certainly be used as an all encompassing group of holdings, those who wish to adopt an investment strategy that is tilted towards the energy sector can also use this model portfolio as a smaller part of their overall group of holdings.

Disclosure: Certain sections of this article were republished with permission from ETFdb.com. Click here to view the original portfolio. No positions at time of writing.

Follow us on Twitter @CommodityHQ

Editor's note: This article by Daniela Pylypczak was originally published on Commodity HQ.
No positions in stocks mentioned.