Indexing Big Oil: A Fresh Take on Energy Investing

The oil industry isn’t going away any time soon, even if the world continues to move towards clean energy. The U.S. has never been as energy self-sufficient as it is today, thanks to the rapid increase of domestic oil and natural gas production. And that trend does not seem to have an end in sight—with bidding wars over the Permian Basin and high-flying acquisition prices for oil companies making news in the sector.

The oil and gas industry can be divided into three segments, with each segment creating energy market gyrations and moments of opportunity for traders and investors. These segments are referred to as upstream, midstream, and downstream.

  • Upstream is associated with the exploration and production of crude oil. This includes the drilling of wells, research into new drilling sites, and all other aspects of the exploration & production process for crude oil.

  • Midstream is associated with companies involved in the transportation, storage, and wholesale distribution of crude petroleum products.

  • Downstream is associated with the process of refining, marketing, and distributing the byproducts such as gasoline down to the retail or consumer level.

Energy Sector Index landscape: know before you trade

The Select Sector Energy Index and the Dow Jones U.S. Oil & Gas Index are typically known as the energy benchmark indices. However, due to a market cap weighted approach, two companies, Exxon and Chevron, make up approximately 43% of those indices. They may seem diverse because they have between 29 and 67 names in each index, but really both indices are heavily concentrated on those two names and then lesser allocations to many smaller players in the energy industry.

The Solactive MicroSectors U.S. Big Oil Index was introduced in 2019 as an alternative to the Select Sector Energy Index and the Dow Jones U.S. Oil & Gas Index. This equal weighted index is comprised of the 10 largest energy companies in the United States. Exxon and Chevron make up only 20% (10% each) of the MicroSectors U.S. Big Oil Index.

To illustrate the impact of the market cap weighting approach for these two indices, if the Select Sector Energy Index and the Dow Jones U.S. Oil & Gas Index were to exclude Exxon Mobil and Chevron then the average weighted market capitalization would drop from roughly $140 billion each to roughly $37 billion for the Select Sector Energy Index and $33 billion for the Dow Jones U.S. Oil & Gas Index. To compare, the MicroSectors U.S. Big Oil Index is roughly $90 billion in average weighted market cap when excluding Exxon and Chevron. The MicroSectors U.S. Big Oil Index is solely focused on the ten biggest names in energy, not the lesser players.

Solactive MicroSectors U.S. Big Oil Index versus competitor benchmarks since March 2013

Source: Bloomberg, 3/15/2013-7/31/2019

Drawdown Analysis During Oil Sell-off

During the crude sell off of late 2015 and early 2016 oil fell below $27 from over $60 in ten months due to OPEC failing to agree on oil production levels as U.S. output surged. During this time, MicroSectors U.S. Big Oil index had the least amount of drawdown relative to these benchmark indices.

Source: Bloomberg

The Solactive MicroSectors U.S. Big Oil Index fills a gap in the marketplace for sector-specific trading products that deliver precisely targeted exposure.

What is the Solactive MicroSectors U.S. Big Oil Index?

The Solactive MicroSectors U.S. Big Oil Index includes 10 highly liquid stocks that represent industry leaders across today’s U.S. oil/energy sector. The index’s underlying composition is equally weighted across all stocks, providing a unique performance benchmark that allows for a value-driven approach to investing.

Why did we launch the Big Oil Index?

We created the MicroSectors Big Oil index to provide investors and traders a new benchmark for the most closely watched and biggest names in energy. Other energy indices are top heavy and include allocations to many of the smaller players in the industry. We feel that there are advantages to having an equally-weighted index comprised of just the top players. The MicroSectors Big Oil index comprises the ten largest American oil producing companies by market cap.

Solactive MicroSectors U.S. Big Oil Index Holdings:

Source: Bloomberg, market cap & weighting data as of 7/19/2019. Index rebalances monthly to equal weight.

Laser focus on the names that lead the sector

Energy stock prices can be driven by numerous factors such as OPEC decisions, demand for oil, geopolitics, domestic legislation, and advancements in clean energy alternatives.

Investors and traders may face uncertainty when trying to pick which oil companies survive or perform the best due to outside factors or even the company specific factors like oil spills. But if you do want to participate in this trade, it’s the biggest, most highly traded names in the energy/oil sector that may give you the play you’re looking for.

While the 10-stock basket in the Solactive MicroSectors U.S. Big Oil Index constitutes approximately one-third of the Select Energy Index, by weight, it makes up 57% of the social media velocity for that entire index.

Social Media Velocity Comparison: MicroSectors U.S. Big Oil Index vs the Select Energy Index

Index constituents per Bloomberg 07/18/19. REX Social Velocity score based on number of followers for each constituent across news and social media channels such as Stocktwits.

Bottom line:

With the merger between Anadarko and Occidental Petroleum, will there be more M&A activity in the space? Will oil prices continue to fluctuate? How will the current state of the geopolitical sphere effect how these energy companies move forward?

Whether you have a strong bullish or bearish view on the oil sector, we believe this energy index may be for you.

Please visit our website for guidance on available products linked to the Solactive MicroSectors U.S. Big Oil Index:

This information is not intended to be investment advice. Past performance does not guarantee future results.

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