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An Easy Way to Make Money in Oil, Gas, and Fracking

By Selena Maranjian - Apr 9, 2013 at 7:42PM

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There are some hefty and growing dividends in here.

Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you'd like to add some oil and gas stocks to your portfolio, the Market Vectors Unconventional Oil & Gas ETF (FRAK) 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 0.54%. The fund is very small, though, so if you're thinking of buying, beware of possibly large spreads between its bid and ask prices. Consider using a limit order if you want to buy in.

This ETF is too young to have a sufficient track record to assess. 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 and gas?
Oil and gas exploration and production companies are worth considering because despite growing interest in alternative energy, we're still quite dependent on good old oil and gas. The growing practice of fracking, in particular, is presenting great promise while also inspiring passionate opposition.

More than a handful of oil and gas companies had strong performances over the past year. Hess (HES 1.47%) surged 25%, amid its transformation into a pure-play exploration and production company after it shed its downstream operations (i.e., refineries, gas stations, etc.). With the money it raises from divestitures, the company plans to significantly hike its dividend and pay down debt. Hess has also been a target of agitation by activist investment company Elliott Management.

Houston-based oil and natural gas company Linn Energy (LINEQ) gained 6% and offers a hefty dividend yield of 7.6%. Better still, some expect further increases in the payout, due to recent income-generating acquisitions. The company specializes in buying mature, productive energy assets. It's also admired for its successful long-term hedging and organic growth, and is seen by some as a very promising investment

Other companies didn't do as well last year, but could see their fortunes change in the coming years. Chesapeake Energy (CHKA.Q) slid 9%. Long reviled by many for questionable and regrettable management moves, it has been selling assets and addressing sizable debt. Bulls like its major presence in the promising Utica shale field, among other things.

Exploration and production specialist Whiting Petroleum (WLL) shed 10%. It's a major operator in the productive Bakken region, and its last earnings report featured record production and growing proved reserves. Management also expects double-digit production growth in 2013. Bulls like its well-positioned and sizable asset portfolio, and the company seems undervalued as well.

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.


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Stocks Mentioned

Chesapeake Energy Corporation Stock Quote
Chesapeake Energy Corporation
Hess Corporation Stock Quote
Hess Corporation
$115.09 (1.47%) $1.67
Whiting Petroleum Corporation Stock Quote
Whiting Petroleum Corporation
Linn Energy, LLC Stock Quote
Linn Energy, LLC
VanEck Vectors ETF Trust - VanEck Vectors Unconventional Oil & Gas ETF Stock Quote
VanEck Vectors ETF Trust - VanEck Vectors Unconventional Oil & Gas ETF

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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