Dynamic Play on Energy

05/23/2014 8:00 am EST

Focus: ETFs

Nicholas Vardy

Editor, Oxford Wealth Accelerator

A profound shift in the source of US energy, improving company fundamentals, and recent geopolitical tensions in the Ukraine have only increased the US energy sector's attractiveness, suggests Nicholas Vardy, editor of The Alpha Investor Letter.

Up until recently, US oil production was in serious decline. But the “fracking” revolution has shifted the US energy landscape in ways not thought possible as recently as a decade ago.

The United States may be sitting on five times the oil reserves of Saudi Arabia. There may be twice as much shale oil trapped in the Bakken Formation of North Dakota alone as in the entire Prudhoe Bay of Alaska.

And this dominance extends to natural gas. Shale gas production in the United States rose more than fourfold between 2007 and 2010.

The PowerShares Dynamic Energy Exploration & Production Portfolio (PXE) is an opportunity to profit from just such changes.

PXE tracks the Dynamic Energy Exploration & Production Intellidex Index, which includes 30 companies selected on the basis of price momentum, earnings momentum, quality, management action, and value.

While it offers plenty of exposure to exploration and production companies, PXE also includes petroleum refineries that process the crude oil into finished products, such as gasoline and automotive lubricants, as well as companies involved in gathering and processing natural gas and those that manufacture natural gas liquid.

As a result of its rigorous selection process, this ETF invests in fewer of the largest US oil companies, which usually dominate cap-weighted ETFs.

For all of its potential, the energy sector is still relatively cheap. Compared with the run-up in biotech and healthcare stocks, PXE's price-to-earnings (P/E) ratio of 15.79 and price-to-book ratio of 1.73 make it a relative bargain.

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