Here’s an Easy Path to Oil and Gas Profits

Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you expect the oil and gas industry to do well over the long haul, the iShares Dow Jones U.S. Oil and Gas Exploration Index ETF (NYSE: IEO  ) could save you a lot of trouble. Instead of trying to figure out which companies will perform best, you can use this ETF to invest in lots of them simultaneously.

The basics
ETFs often sport lower expense ratios than their mutual fund cousins. The iShares ETF's expense ratio -- its annual fee -- is a relatively low 0.47%. The fund is a bit small, too, so if you're thinking of buying, beware of occasional large spreads between its bid and ask prices. Consider using a limit order if you want to buy in.

This ETF has performed rather well, beating the world market over the past three and five years. As with most investments, of course, we can't expect outstanding performances in every quarter or year. Investors with conviction need to wait for their holdings to deliver.

With a low turnover rate of 13%, this fund isn't frantically and frequently rejiggering its holdings, as many funds do.

What's in it?
More than a handful of oil and gas companies had strong performances over the past year. Phillips 66 (NYSE: PSX  ) , the recently spun-off downstream business of ConocoPhillips, is the nation's largest independent oil refiner. Its stock recently hit a 52-week high, getting a boost from falling oil prices that swell its profit margins. It also initiated a dividend, yielding about 1.7%. Its stock is less of a bargain now, though, and its bears worry about competition and tight profit margins. Interested investors might want to wait for stronger profit margins or a lower entry price. Citigroup analysts recently downgraded it and other refiners on valuation concerns and the risk of a warm winter.

Valero Energy (NYSE: VLO  ) , another major refiner, was also downgraded by Citigroup, largely due to its price run-up. It surged 58% over the past year, hitting a 52-week high. The company can benefit from lower crude oil prices, which mean lower input prices for refiners and, thus, higher profit margins. Valero has had a tough time lately, and recently shut down its Aruba refinery, which PetroChina may buy, handing Valero a loss and write-off. The company’s fans like its solid fundamentals and growth prospects.

Other companies didn't do as well last year, but could see their fortunes change in the coming years. Chesapeake Energy (NYSE: CHK  ) dropped 34%, as its management and board have appalled the investing world in ways that led my colleague Alyce Lomax to call the stock "vile." It looks like changes for the better are afoot, but many are still steering clear of the stock for now. It doesn’t help that it’s a huge natural-gas player at a time when natural-gas prices are very low. (That means they’re likely to rise in coming years, though.) Meanwhile, the company is selling billions of dollars worth of assets, and focusing on developing the assets it has, while increasing its higher-margin activities. Some speculate that the company could be bought out, too.

Devon Energy (NYSE: DVN  ) , down 5%, is seen as rather attractive by some Fool analysts, who think the market has been overlooking its substantial liquids business. They also like its rising oil output, as well as its strong balance sheet, which features a dropping debt level.

The big picture
Demand for oil and gas isn't going away anytime soon. A well-chosen ETF can grant you instant diversification across any industry or group of companies -- and make investing in and profiting from it that much easier.

It you’re looking for an energy stock for your portfolio, know that there’s one oil and gas company that's found a way to profit regardless of price fluctuations. Read more about it in our special free report: "The Only Energy Stock You'll Ever Need."

Longtime Fool contributor Selena Maranjian, whom you can follow on Twitter, holds no position in any company mentioned. Click here to see her holdings and a short bio. The Motley Fool owns shares of Devon Energy. Motley Fool newsletter services have recommended buying shares of Devon Energy. The Motley Fool has a disclosure policy.

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