Growth Potential (and a Little Income) in Energy

Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you'd like to add some energy stocks to your portfolio, the Vanguard Energy ETF (NYSEMKT: VDE  ) 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 energy ETF's expense ratio -- its annual fee -- is a very low 0.14%. (Vanguard is known for low fees.) It also recently yielded 1.8%.

This ETF has performed well, topping the world markets 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 12%, this fund isn't frantically and frequently rejiggering its holdings, as many funds do.

Why energy?
Energy is a defensive sector, as demand for it doesn't drop by a lot when economic times get tough. Interest in alternative energies is definitely growing, but we're still quite dependent on good old oil and gas. Thus, oil and gas exploration and production companies are worth considering -- and some of them have been getting involved in alternative energies, too.

More than a handful of energy companies had strong performances over the past year. Drilling services giant Halliburton (NYSE: HAL  ) , for example, advanced 13%, despite being affected by a glut of natural gas leading many to cut back on drilling operations. On the other hand, though, the company's expertise in mature fields, unconventional markets, and deep drilling are pluses. And its revenue growth rates have been accelerating in recent years, firmly in double-digit territory. Some also like Halliburton's expanding work in developing economies such as Brazil. Latin American operating income rose 25% in the fourth quarter.

Other companies didn't do as well last year, but could see their fortunes change in the coming years. Independent oil and gas producer Apache (NYSE: APA  ) shed 15% but maintains competitive advantages such as its geographic diversification, with operations not only in North America but also places such as Egypt, Argentina, and Australia. The company has spent some $16 billion on acquisitions in the past few years. Some see the stock as attractively priced right now, with a forward P/E ratio of 7.

National Oilwell Varco (NYSE: NOV  ) slipped 13%. It's the biggest U.S. maker of oil-field equipment, with my colleague Aimee Duffy pointing out that, "Ninety percent of the world's rigs have National Oilwell Varco equipment on them." Some would like to see its profit margins grow more, while others are concerned about a slip in free cash flow. Still, its operations in deepwater drilling are serving it well.

Chesapeake Energy (NYSE: CHK  ) dropped 7%, with its biggest recent news being the departure of its controversial CEO, Aubrey McClendon, whose actions in recent years dismayed many investors and led my colleague Alyce Lomax to call the stock "vile." It has struggled as a huge natural gas player at a time when natural gas prices are very low. (That means prices are likely to rise in coming years, though.) Meanwhile, Chesapeake is selling billions of dollars' worth of assets and focusing on developing the assets it has while increasing its higher-margin activities. Shares popped on McClendon's exit, but the company's future remains a bit murky.

The big picture
Demand for energy 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.


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