Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you'd like to add some oil services stocks to your portfolio, the Market Vectors Oil Services ETF (OIH +0.75%) 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 Market Vectors ETF's expense ratio -- its annual fee -- is a relatively low 0.35%.
This ETF is too young to have a sufficient track record to assess, though it has underperformed the world market over the past year. 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.
Why oil services?
Oil is likely to remain in demand for quite some time, despite the growth of alternative energies in recent years. And along with the big oil companies familiar to most of us, there are a host of companies that serve them, offering necessary products and services.
More than a handful of oil services companies had strong performances over the past year. Seadrill (SDRL +0.00%), for example, gained 12%. One of the world's largest oil and gas offshore drillers, it operates in the most profitable deepwater drilling regions, among other locations. Bears don't like its debt levels or negative free cash flow, while bulls drool at its whopping 8.7% dividend yield.
Other companies didn't do as well last year, but could see their fortunes change in the coming years. Weatherford International (NYSE: WFT), for example, sank 26%, partly due to an estimate that it will pay millions in settlements to multiple U.S. agencies investigating possible improper practices abroad. The company has been plagued by accounting-related problems as well and remains challenged by low gas prices and low margins related to an Iraqi contract.
National Oilwell Varco (NOV 0.26%) slipped 18%. It's the biggest U.S. maker of oil-field equipment and a "quiet moneymaker," with operating margins and debt levels comparing favorably with peers and a record capital equipment backlog of nearly $12 billion. Like SeaDrill, it's also involved in the profitable offshore drilling arena.
Nabors Industries (NBR +0.91%), which owns the world's biggest fleet of land-drilling rigs, sank 16%. The company has been working on decreasing its debt, in part by selling off assets, and there's some speculation about a possible leveraged buyout. Despite a slowdown in drilling and rising costs, the company managed to post an increase in earnings in its third quarter. Its involvement in fracking has some concerned, though, and its order backlog is small compared to peers, as is its net margin.
The big picture
Demand for oil 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.
