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: https://www.microsectors.com/bigoil


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


Bank of Montreal, the issuer of the ETNs, ("Bank of Montreal" or the "Issuer"), has filed a registration statement (including certain pricing supplements, prospectus supplement and prospectus) with the Securities and Exchange Commission (the "SEC") about each of the offerings to which this website relates. Please read those documents and the other documents relating to these offerings that Bank of Montreal has filed with the SEC for more complete information about Bank of Montreal and these offerings. These documents may be obtained without cost by visiting EDGAR on the SEC website at www.sec.gov. Alternatively, Bank of Montreal, any agent or any dealer participating in these offerings will arrange to send the applicable pricing supplement, the prospectus supplement and the prospectus if so requested by calling toll-free at 1-877-369-5412.


The ETNs are senior, unsecured debt obligations of Bank of Montreal, and are subject to Bank of Montreal’s credit risk.


The ETNs are intended to be daily trading tools for sophisticated investors to manage daily trading risks as part of an overall diversified portfolio. They are designed to achieve their stated investment objectives on a daily basis. You should proceed with extreme caution in considering an investment in the ETNs.


The ETNs do not guarantee any return of your investment. If the closing Indicative Note Value or the Intraday Indicative Value for the ETNs is equal to or less than $0 at any time during an Exchange Business Day (each as defined in the applicable pricing supplement), you will lose all of your investment in the ETNs. Even if the Index Closing Level has increased or decreased, as applicable, from the Initial Index Level, you may receive less than the principal amount of your ETNs upon a call, redemption, at maturity, or if you sell your ETNs, as well as consequences of any leverage, each as described in more detail in the applicable pricing supplement.

Leverage (if applicable) increases the sensitivity of your ETNs to changes in the level of the Indices (as defined in the applicable pricing supplement). Investment suitability must be determined individually for each investor, and the ETNs are not suitable for all investors. The ETNs are not suitable for investors with longer-term investment objectives. You should regularly monitor your holdings of the ETNs to ensure that they remain consistent with your investment strategies. In particular, the ETNs should be purchased only by sophisticated investors who do not intend to hold the ETNs as a buy and hold investment, who are willing to actively and continuously monitor their investment and who understand the consequences of investing in and of seeking daily resetting investment results, which are leveraged as to some of the ETNs. Due to the effect of compounding, if the Indicative Note Value increases, any subsequent adverse change in the Index level will result in a larger dollar reduction from the Indicative Note Value than if the Indicative Note Value remained constant; the converse is also true. The ETNs are subject to intraday purchase risk. The Indicative Note Value is reset daily, and the leverage or exposure of the ETNs during any given Exchange Business Day may be greater than or less than that contemplated by the name of a particular leveraged ETN.


The ETNs are subject to a call right, which may adversely affect the value of, or your ability to sell, your ETNs. The ETNs do not pay any interest, and you will not have any ownership rights in the Index constituents. The Index Closing Level used to calculate any payment by the Issuer of the ETNs may be different from the Index Closing Level at other times during the term of the ETNs. There are restrictions on your ability to request a redemption of the ETNs, and you will not know the amount due upon redemption at the time you elect to request that the ETNs be redeemed. The Issuer may sell additional ETNs, but is under no obligation to do so.


Market disruptions may adversely affect your return. Significant aspects of the tax treatment of the ETNs are uncertain.

The Intraday Indicative Value and the Indicative Note Value are not the same as the closing price or any other trading price of the ETNs in the secondary market. There is no assurance that your ETNs will be listed or continue to be listed on a securities exchange, and they may not have an active trading market. The value of the ETNs in the secondary market may be influenced by many unpredictable factors.


The Issuer or its affiliates may have economic interests that are adverse to those of the holders of the ETNs as a result of its business, hedging and trading activities, or as Calculation Agent (as defined in the applicable pricing supplement) of the ETNs, and may have published research, expressed opinions or provided recommendations that are inconsistent with investing in or holding the ETNs, and may do so in the future.

Each Index has limited actual historical information. The Index Calculation Agent (as defined in the applicable pricing supplement), may adjust the Index in a way that may affect its level, and may, in its sole discretion, discontinue the public disclosure of the intraday Index value and the end-of-day closing value of the Index. The Indices lack diversification and are vulnerable to fluctuations in the applicable sector. A limited number of Index constituents may affect each Index Closing Level, and the Indices are not necessarily representative of its focus industry. An Index constituent may be replaced upon occurrence of certain events. The manner in which each Index selects its components may differ from how other index providers or market participants might do so.

Use of Hypothetical Back-Tested Data - The historical data of the Indices shown herein is from the dates displayed. Any Index data shown prior to that date is hypothetical and a result of the application of the Index methodology to historical data, and has inherent limitations. The creation of hypothetical data necessarily involves assumptions and cannot take into account the impact of financial risk in actual trading. Alternative modeling techniques or assumptions may produce different hypothetical back-tested information that might be more appropriate and that might differ significantly from the information presented herein. The hypothetical back-tested data herein should not be considered indicative of actual results that might be obtained from an investment in a financial instrument referencing the Index.


Historical and hypothetical back-tested results are neither an indicator nor a guarantee of future Index performance or the return of the ETNs.


Please see the “Risk Factors” section in the pricing supplement, the prospectus supplement and the prospectus relating to the applicable offering.


This information is not intended to provide and should not be relied upon as providing accounting, legal, regulatory or tax advice. We urge you to consult your investment, legal, tax, accounting and other advisers before you invest in the ETNs.

MicroSectors™ and REX™ are registered trademarks of REX Shares, LLC (“REX”). The trademarks have been licensed for use for certain purposes by Bank of Montreal. The ETNs are not sponsored, endorsed, sold or promoted by REX or any of its affiliates or third party licensors. REX Index Parties only relationship to Bank of Montreal with respect to the Index is the licensing of the Index and certain trademarks, service marks and/or trade names of REX Index Parties.


Solactive AG (“Solactive”) is the licensor of the Solactive MicroSectors™ U.S. Big Oil Index and the Solactive MicroSectors™ U.S. Big Oil Index . The ETNs are not sponsored, endorsed, promoted or sold by Solactive in any way, and Solactive makes no express or implied representation, guarantee or assurance with regard to: (a) the advisability in investing in the ETNs; (b) the quality, accuracy and/or completeness of the Index; and/or (c) the results obtained or to be obtained by any person or entity from the use of the Index. Solactive does not guarantee the accuracy and/or the completeness of the Index and shall not have any liability for any errors or omissions with respect thereto. Notwithstanding Solactive’s obligations to its licensees, Solactive reserves the right to change the methods of calculation or publication of the Index, and Solactive shall not be liable for any miscalculation of or any incorrect, delayed or interrupted publication with respect to the Index. Solactive shall not be liable for any damages, including, without limitation, any loss of profits or business, or any special, incidental, punitive, indirect or consequential damages suffered or incurred as a result of the use (or inability to use) of the Index.


Copyright © 2019 REX Shares, LLC, All rights reserved.

REX Shares White Font RGB_30_36_46_Backg
Stay updated

203-557-6201

info@rexshares.com

  • White Twitter Icon
  • White LinkedIn Icon

© 2020 REX Shares, LLC