Gimmicky ETF Is Worth the Energy

• ByRoger Nusbaum, TheStreet.com Contributor
• On 5:00 am EST, Tuesday November 3, 2009

Companies that sell exchange traded funds have been rightly accused of creating some gimmicky funds. State-based ETFs seem to be the latest, now that the Oklahoma Exchange Traded Fund is trading.

Upon further review, the Oklahoma fund, sold by OOK Advisors LLC, isn't all that gimmicky. It appears to offer genuine differentiation. Some may criticize the ETF for its extreme weighting in energy -- 72% is invested in high-yielding pipeline owners, drillers and refiners, making it a domestic energy fund. It allocates another 13% toward utilities. But unlike other energy funds, the Oklahoma ETF is big on smaller companies. Its holdings have a median market value of $3.3 billion, compared with $112 billion for the SPDR Energy Select Sector SPDR, which is dominated by Exxon Mobil and Chevron.

The Oklahoma Exchange Traded Fund employs a modified market-cap weighting system so no stock is too influential. That results in several companies of varying size. Large positions include familiar names like Devon Energy and Williams Cos., and some not so familiar, such as Continental Resources. The non-energy stocks include a couple of financial companies as well as chain restaurant Sonic Corp. and LSB Industries, which makes geothermal heat pumps.

The fund has 29 holdings in all, with pipeline stocks and utilities giving the fund a 2.08% dividend yield. Other energy sub-sectors include 26% in drilling and exploration, 18% in oil and gas refiners and 5% in coal.

As energy prices have rocketed this year, the index underlying the Oklahoma Exchange Traded Fund has risen 37%, double that of the Energy Sector SPDR. If energy prices fall, expect the Oklahoma fund to decline more than the sector SPDR.

Funds may occasionally be marketed with a gimmick but serve a legitimate purpose. For the Oklahoma Exchange Traded Fund, that means unique exposure to the domestic energy sector. Once you get past the marketing angle and look under the hood, the fund could be popular. A soon-to-be-released Texas ETF is heavy in large S&P 500 Index companies with a tilt toward energy and big tech stocks. If that fund gains traction, it might be because it has very little financial exposure, but that remains to be seen.

-- Reported by Roger Nusbaum.

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