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Must-know ideas for investors: Riding the US energy boom

Russ Koesterich, CFA of BlackRock

Overview: Ways to play the US energy boom (Part 2 of 2)

(Continued from Part 1)

For investors wondering how to play this boom, here are two ideas to consider, one perhaps obvious and one not.

Overweight US Energy Companies:

This one may be obvious. All else being equal, higher domestic energy production should give US energy companies a greater share of the global energy market. In addition, even with rising US production, oil prices have remained stable thanks to production declines in other parts of the world and ongoing unrest in the Middle East. Thus, increased domestic production should translate into higher earnings for US energy producers. One way to access US energy companies is the iShares Dow Jones U.S. Energy Sector Index Fund (IYE).

Market Realist – The iShares Dow Jones U.S. Energy Sector Index Fund (IYE), seeks investment results that correspond generally to the price and yield performance of the Dow Jones U.S. Oil & Gas Index. The Index measures the performance of the United States equity market oil and gas sector. It  includes companies in industry groups, such as oil and gas producers, and oil equipment, services, and distribution. The IYE has shown high growth in the first half of 2014 as a result of the rising oil prices. It’s a good avenue for investors wanting to ride the energy boom. The global equivalent of IYE is iShares Global Energy ETF (IXC), which tracks  S&P Global 1200 Energy Sector Index. The graph shows how the U.S. Energy sector has outpaced the Global Energy sector; this however, may be partially boosted by the equity rally in the U.S. market.

Consider US Manufacturing & Materials Companies:

The implications of the US energy boom, however, go far beyond the energy sector. Increased domestic shale production has helped bring down the cost of natural gas. And this represents a competitive edge for US manufacturing and materials companies dependent on natural gas. In fact, US natural gas costs are now a fraction of those in Europe or Asia.

The chemical industry, in particular, is arguably the biggest beneficiary of the US energy revolution given that natural gas is a key ingredient in manufacturing a variety of chemicals and plastics. In addition, it looks as though the benefits of the shale revolution may not yet be fully factored into the prices of chemical company stocks.

To be sure, there’s always the chance that other countries may ramp up their energy production or at least keep levels stable, eliminating some of the potential benefits to US firms. However, while other countries have the potential for similar shale gas deposits, so far no other country or region has been able to exploit this opportunity to the same degree as the United States.

Market Realist − While North American production is on the upsurge, there’s a huge drop in supply from other sources. Heightened unrest in the Middle East and Africa has resulted in big drops in production and exports. This supports the U.S. energy stocks rally, which would continue to hold especially in light of the Iraq violence.

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