Will Oil Stink Over The Next Decade? – Vanguard Energy ETF (NYSEARCA:VDE)

This research report was produced by Colorado Wealth Management Fund with assistance from Big Dog Investments.

The Vanguard Energy ETF (VDE) hasn’t seen the best decade from an investor’s standpoint. Oil has seen a mix of high volatility and poor overall returns. There have been a few good years, but they’ve been followed up by bad ones.

Here’s what the ETF does from Vanguard:

Here are the subsectors:

Earnings have been in a bit of a lull for oil. It’s led to these PE ratios:

Normally, a high PE ratio makes me think that valuations are too high. Since earnings have been temporarily low, it’s affected this ratio significantly. For investors looking to get some allocation to oil, I wouldn’t be too concerned with this ratio.

Expenses and yield

As usual, Vanguard offers a cheap way to get into a sector with an expense ratio of 0.10%. Currently, VDE has a yield of 2.71%, which is nice for an ETF.

Who would want the ETF?

This ETF is a great way to get some diversified allocation to the energy industry. For investors wanting to get more than just a few stocks in their portfolio, this fund offers 134 stocks. Even though investors may appreciate the fund’s strategy with having so many holdings, the top two account for more than 37% of the entire fund.

Portfolio and risk

Past performance hasn’t been good for anyone who has had this fund in their portfolio over the last decade. Here are the returns from Morningstar:

Not so good. The interesting part is this fund didn’t take a bad hit during the 2007-2008 period. This was a time where some funds were down over 50%. However, with all the politics and new methods for attempting to get oil, there have been some odd supply and demand movements. This has led to insane volatility. There’s risk in any investments. I don’t believe the last 10 years are indicative of future performance. There are a lot of politics and money involved in oil which is good for the larger players.

Current market environment

I have considered purchasing individual companies within this fund during dips over the last several years. When they did happen, I had something better to invest in or just didn’t have the capital on hand. While the market overall has climbed to insane heights since 2009, VDE has literally stayed about even. If we were to see a market panic, people are still going to purchase oil. The issues appear to be stemming from supply rather than demand.

Holdings

Here are the top 40 holdings of the company:

Ticker

Company Name

% Allocation

(XOM)

Exxon Mobil Corp.

22.57%

(CVX)

Chevron Corp.

14.03%

(SLB)

Schlumberger Ltd.

6.53%

(COP)

ConocoPhillips

3.88%

(EOG)

EOG Resources Inc.

3.72%

(OXY)

Occidental Petroleum Corp.

3.26%

(PSX)

Phillips 66

2.76%

(KMI)

Kinder Morgan Inc. P

2.72%

(HAL)

Halliburton Co.

2.63%

(VLO)

Valero Energy Corp.

2.18%

(MPC)

Marathon Petroleum Corp.

1.97%

(PXD)

Pioneer Natural Resources Co.

1.93%

(APC)

Anadarko Petroleum Corp.

1.81%

(WMB)

Williams Companies Inc.

1.77%

(–)

Baker Hughes Inc.

1.56%

(APA)

Apache Corp.

1.30%

(CXO)

Concho Resources Inc.

1.27%

(DVN)

Devon Energy Corp.

1.13%

(ANDV)

Tesoro Corp.

1.00%

(NBL)

Noble Energy Inc.

0.94%

(NOV)

National Oilwell Varco Inc.

0.89%

(HES)

Hess Corp.

0.89%

(FTI)

TechnipFMC Plc

0.86%

(COG)

Cabot Oil & Gas Corp. Class A

0.85%

(–)

Cmt Market Liquidity Rate

0.82%

(OKE)

Oneok Inc.

0.78%

(MRO)

Marathon Oil Corp.

0.72%

(Close)

0

0.00%

(EQT)

EQT Corp.

0.72%

(LNG)

Cheniere Energy Inc.

0.70%

(TRGP)

Targa Resources Corp.

0.69%

(XEC)

Cimarex Energy Co.

0.64%

(FANG)

Diamondback Energy Inc.

0.57%

(PE)

Parsley Energy Inc. A

0.44%

(HP)

Helmerich & Payne Inc.

0.42%

(RRC)

Range Resources Corp.

0.41%

(NFX)

Newfield Exploration Co.

0.40%

(EGN)

Energen Corp.

0.34%

(AR)

Antero Resources Corp.

0.34%

(HFC)

Hollyfrontier Corp.

0.33%

I took the top batch of holdings and plugged them into CPMS.

CPMS Assessment

Each stock was ranked by their relative performance on several metrics with the each metric carrying its own weighting.

The weights were:

25% Dividend Yield

25% P/E on current year estimated earnings

12.5% P/E on next year’s consensus earnings

12.5% 5-year beta

5% market capitalization

12.5% price to sales

5% EV to EBITDA

2.5% price to cash flow

Any investor with the program could assign their own weightings, but I felt these were very useful metrics across most sectors.

XOM and CVX both scored well on the weighting structure I built in CPMS.

Conclusion

Oil has a few similarities to tobacco. While the production process is vastly different, the similarities lie in consumption. Even when the economy sputters, there is still substantial demand for both products. Oil has a place in our daily lives, and a substantial reduction in use is very difficult for consumers. The advantage for tobacco comes from brand loyalty and price consistency.

I’ve considered investing in Exxon and Chevron when their price has dropped materially and will still keep an eye on prices. For investors looking into VDE, keep in mind the volatility has been significantly higher than the S&P 500 (SPY). The volatility is likely to continue, but there is potential for strong gains. I think the next decade for oil will be substantially better than the last. For investors who want a more defensive allocation to the energy sector, XOM and CVX are good options.

VDE is a good fund for having a diversified allocation to the energy sector. For investors who don’t know much about the industry and can’t handle volatility, I’d look elsewhere. The Vanguard Consumers Staples ETF (VDC) is a great way to invest with low volatility and strong returns. It’s my favorite defensive fund.

For more information about CPMS, visit Morningstar-CPMS or contact Morningstar by E-mail.

Click The Mortgage REIT Forum to sign up for:

  • Actionable buy and sell target prices
  • Best research on preferred shares and REITs
  • Best reviews on the site – 209/210 stars
  • Stable dividend yields over 7%
  • You get instant actionable SMS alerts.
  • Sign up before September 1st, 2017, to lock in at $350/year

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: No financial advice. Investors are expected to do their own due diligence and consult with a professional who knows their objectives and constraints. CWMF actively trades in preferred shares and may buy or sell anything in the sector without prior notice. Tipranks: No ratings in this article.

Leave a Reply

Your email address will not be published. Required fields are marked *

*

3 × five =