Top Ranked Energy ETF in Focus: PSCE

Zacks

After a major setback in 2012, the U.S. energy sector appears to be rebounding in 2013 and in fact is all set to take the top performers’ spot given its strong fundamentals and low valuations.

This is thanks to a solid trend in the energy exploration field, and booming production in regions like North Dakota and Texas. In fact, the sector has surged mainly due to a rise in U.S. oil production which has cut down on the nation’s net oil imports.

An estimate by International Energy Agency (:IEA) projects that the world’s largest economy will achieve shale oil production of 9 million barrels a day by 2018. Some believe that the country will surpass Saudi Arabia in oil production by 2020 (see Crude Oil ETF Investing 101).

A strong dollar and risks from oil industries in Egypt and Libya have been an added advantage to the U.S. energy sector. The country is expected to be “energy independent” by 2035 and start exporting natural gas by the end of this decade.

According to the Labor Department, the oil and natural gas industry in the U.S. accounted for a large share of the gains in private sector employment, further adding to the bullishness in the sector. (Read: 3 Energy ETFs for America's Production Boom).

This pumped optimism into the energy stocks and consequently the ETFs since the start of 2013.The bullish fundamentals make it important to find a top ranked pick in this segment. In order to do this, investors can look at the Zacks ETF Rank and find the top energy ETF.

About the Zacks ETF Rank

The Zacks ETF Rank provides a recommendation for the ETF in the context of our outlook for the underlying industry, sector, and style box or asset class (Read: Zacks ETF Rank Guide). Our proprietary methodology also takes into account the risk preferences of investors. ETFs are ranked on a scale of 1 (Strong Buy) to 5 (Strong Sell) while these also receive one of the three risk ratings, namely Low, Medium or High.

The aim of our models is to select the best ETF within each risk category. We assign each ETF one of the five ranks within each risk bucket. Thus, the Zacks ETF Rank reflects the expected return of an ETF relative to other products with a similar level of risk.

For investors seeking to apply this methodology to their portfolio in the Energy sector, we have taken a closer look at the top ranked PSCE. This ETF, with a Zacks ETF Rank of 1 or ‘Strong Buy’ (see the full list of top ranked ETFs), is detailed below.

About the Small Cap Energy ETF

Launched in April 2010, PowerShares S&P Small Cap Energy ETF (PSCE) is a passively managed fund designed to track the performance of the S&P Small Cap 600 Capped Energy Index. The product will normally invest at least 90% of its total assets in common stocks that comprise the Index. It has amassed $287.7 million in its asset base.

The fund has holdings of 27 stocks of small U.S. energy companies in its basket. The fund is a player in the small-cap and mid-cap stocks, which take a share of 54% and 14%, respectively, with a small proportion in micro cap securities. Style-wise, the ETF calls for uniformity among value and growth funds.

The fund is more concentrated in its top 10 holdings, which give the product more than 64% in the basket. Gulfport Energy, Bristow Group and Exterran Holdings are the top three company holdings of the fund.

The fund is easy on the pocketbook, charging investors 29bps in fees, which is much lower than the category average of 51bps. The product may not be a popular choice and may be overlooked by investors as it trades in low average volumes of only 8,400 shares a day.

However, from a performance perspective, 2013 has so far been a good year for PSCE. The product has topped the sector, beating almost all the funds in its space (see all the Energy ETFs).

PSCE has beaten the titans in the category including SPDR Energy Select Sector Fund (XLE), Vanguard Energy ETF (VDE) and iShares Dow Jones US Energy ETF (IYE) providing sturdy returns of 24.9% so far on a year-to-date basis.

 

Bottom Line

PSCE so far has not been appreciated and favored by investors as is evident from its low trading volume. The fund is currently hovering below its 52-week high price and given its potential, could continue to appreciate in the months to come. (Read: Time to Buy Energy ETFs?).

So, if current trends continue in the market, PSCE could prove to be an intriguing option for investors to play the energy boom this year, especially while maintaining a focus on the domestic market.

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