Small-Cap ETFs Standout in Energy Sector

Small capitalization companies may be lagging other asset categories this year, but small-cap oil stock exchange traded funds are burning up.

The PowerShares S&P SmallCap Energy Portfolio (PSCE) increased 13.5% and IQ Global Oil Small Cap ETF (IOIL) rose 8.9% year-to-date.

In comparison, the Energy Select Sector SPDR (XLE) , which holds over 80% in large- and mega-cap energy stocks, is up 6.5% so far this year.

The small-cap energy ETFs are also outperforming the S&P 500 Index, which is 2.3% higher year-to-date, and the broader small-cap Russell 2000 Index, which has dipped 1.3% this year.

The shale oil boom and shift to value investing has helped bolster small-cap energy ETF plays. [Energy ETFs Energized by Inflows, Low Valuations]

RBC Capital Markets sees bullish prospects for oil rig companies, especially those active in the Permian Basin in west Texas, which comprise about 28% of the country’s drilling machines, CNBC reports. [North America Nirvana for Oil Services ETFs]

“In our view, land drillers will continue to outperform [oil and gas stocks], given prospective increases in rig activity and cash margins,” RBC Capital Markets said in a research note.

Both PSCE and IOIL include a blend of smaller companies that engage in energy infrastructure and actual producers and distributors. The PowerShares ETF tracks the S&P SmallCap 600 Capped Energy Index while the IndezIQ ETF follows a customized IQ Global Oil Small Cap Index, which includes global small-cap oil companies.

PSCE, though, focuses on smaller and more risky companies, which have helped contribute to the better performance so far this year. Small-caps make up 61.6% and micro-caps make up 38.4% of PSCE portfolio. The fund’s top holdings include Bristow Group (BRS) 8.4%, Exterran Holdings (EXH) 7.9% and Stone Energy (SGY) 7.0%.

IOIL includes some larger companies. The ETF includes large-caps 2.1%, mid-caps 45.8%, small-caps 45.3% and micro-caps 6.9%. The fund’s top holdings include Gulfport Energy (GPOR) 9.6%, Kodiak Oil & Gas (KOG) 5.3% and Tonengeneral Sekiyu (TGRLF) 4.2%.

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