Heat Up Your Portfolio With Gas Funds
This week major natural gas players Chesapeake Energy(CHK), Cimarex Energy(XEC) and Newfield Exploration(NFX) beat analysts estimates with their fourth-quarter earnings.
Next week other players in this sector will report, including wildcatter St. Mary Land & Exploration(SM), Plains Exploration & Production(PXP) and Southwestern Energy (SWN).
With all the earnings headlines about these natural gas companies, investors may be wondering what is the best way to play this sector.
Of course, one can always purchase the common stock of firms like Anadarko(APC) and Chesapeake, but I am confident that investors can find solid upside, along with diversification, by holding an ETF or mutual fund that tracks a diverse basket of natural gas producers.
Today, there are three funds in particular that can achieve this goal.
The First Trust ISE-Revere Natural Gas Fund(FCG) is an ETF designed to provide investors with exposure to the largest players in the natural gas arena.
Representing the top five positions of FCG are Delta Petroleum(DPTR), Brigham Exploration(BEXP), Forest Oil(FST), Newfield Exploration and Cimarex Energy.
FCG’s strong diversification ensures investors will not be burned by any single holding. The ETF’s basket consists of 31 companies with top holding Delta Petroleum accounting for only 5% of the fund’s total portfolio. The top five together make up 20% of FCG.
The Fidelity Select Natural Gas Fund (FSNGX) is a mutual fund offering that seeks to achieve a similar goal as FCG. Top holdings include Anadarko, Chesapeake, Plains Exploration & Production, Southwestern Energy Company and Denbury Resources(DNR). FSNGX is slightly more top-heavy than FCG, with the top five constituents accounting for 33% of the fund’s portfolio.
Lastly, a newcomer to the ETF arena provides investors with access to a basket of wildcatters. Unlike FCG and FSNGX, which track natural gas through the industry’s largest players, the Jefferies TR/J CRB Wildcatters Exploration & Production Equity ETF(WCAT) tracks a basket of small-cap drillers.
Because it tracks small-caps, the fund’s play on natural gas is more volatile than others, which means stronger rallies but also steeper declines.
Top holdings include Forest Oil, Encore Acquisition(EAC), Atlas Energy(ATLS), St. Mary Land & Exploration and Progress Energy Resources(PRQ). The WCAT portfolio benefits from good diversification, with only 24% of its portfolio dedicated to its top five constituents.
Going forward, although each of these funds provides investors with ample exposure to the U.S. natural gas players, my personal favorite is FCG.
FCG gains a leg up on FSNGX thanks to its stronger performance. FSNGX is actively managed and can shift its holdings to follow trends in the industry, yet in the three-month period ending Feb. 16, it gained only 1%, compared with 6% for FCG.
In comparing FCG to the small-cap-focused WCAT, the difference is in the volume. Although WCAT is marginally ahead of FCG in the period since Jan. 22, its low volume is an issue. Since it started trading, the fund’s daily volume has failed to break 10,000 more than once. FCG, on the other hand, has an average trading volume of 600,000 shares.
In the future, WCAT may be a strong competitor; however, until a following develops, investors would be best off holding FCG and watching WCAT from the sidelines.
