Drilling into Oil Services

04/07/2016 9:00 am EST

Focus: ETFs

Kuen (Scott) Chan

Editor, Investing Daily's Real World Investing

This oil services play is a core holding in our ETF portfolio; it is recommended for those seeking to generate strong capital gains, explains Kuen Chan in The Complete Investor.

Market Vectors Oil Services ETF (OIH) tracks an oil services index, maintained by the investment firm Van Eck Global.

The index is comprised of the shares of 25 US companies that generate at least half their income from oil equipment, services, or drilling.

Although oil service providers have suffered as plunging energy prices have caused exploration and production companies to slash capital spending, they still have ridden out the downturn in better shape than other energy sectors.

Thus while Market Vectors Oil Services ETF has fallen about 24 percentage points over the twelve months, that looks pretty good compared to the 45 percent drop over the same period in the SPDR S&P Oil & Gas Exploration and Production ETF (XOP).

We’re confident it’s only a matter of time before E&Ps start spending again on growth, which will translate into rebounding demand for the service companies.

The ETF is market cap-weighted, with its top three holdings— Schlumberger (SLB), Halliburton (HAL), and Baker Hughes (BHI)—together representing more than 40 percent of its total value.

These three diversified service companies -- soon to be two if Halliburton and Baker Hughes successfully complete their pending merger -- dominate the sector and will capture a huge part of the industry’s coming recovery. The ETF charges an annual fee of 0.35 percent.

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By Kuen Chan in The Complete Investor

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