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 but don't have the time or expertise to hand-pick a few, the Energy Select Sector SPDR ETF (NYSEMKT:XLE) could save you a lot of trouble. Instead of trying to figure out which stocks will perform best, you can use this exchange-traded fund to invest in lots of energy stocks simultaneously.
Why energy? Well, it's a defensive sector, as demand for it doesn't drop much when economic times get tough. (It's not risk-free, though, as prices for fuel can change dramatically.) 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.
The ETF's Basics
ETFs often sport lower expense ratios than their mutual fund cousins. This ETF, focused on energy stocks, sports a very low expense ratio -- an annual fee -- of 0.16%.
On your own you might not have selected National Oilwell Varco (NYSE:NOV) or Kinder Morgan Inc (NYSE:KMI) as energy stocks for your portfolio, but this ETF includes them among its 45-some holdings. The ETF has outperformed the world market over the past five, 10, and 15 years.
A closer look at National Oilwell Varco
National Oilwell Varco is a titan among energy stocks, with a market cap that tops $30 billion, thanks to savvy acquisitions and an effective growth strategy. Roughly 90% of all drilling rigs use at least some of its equipment, which gives it a lot of pricing power. (It's more dominant in above-ground drilling, but it's gaining share in some undersea operations.)
The company has been dealing with good kinds of problems, such as difficulty meeting demand and a huge and growing capital-equipment order backlog that recently topped $16 billion, up 30% year over year. In order to focus on higher-margin work, National Oilwell Varco has spun off its lower-margin oilfield production equipment distribution business, which now goes by Now (NYSE:DNOW). With its strong balance sheet, sizable market share, and capable management, some see Now as even more attractive than National Oilwell Varco.
National Oilwell Varco has more than quadrupled its dividend in just a few years. It recently yielded 2.3%, and with a forward P/E below 12, it seems an appealing opportunity. Remember, though, that it's in a cyclical business, so it won't grow in a straight line.
A closer look at Kinder Morgan
Pipeline giant Kinder Morgan is a premier midstream master limited partnership enjoying reliable income as it collects gobs of cash from its partners. It's also quite dominant in its field, as its natural-gas network is the largest in North America, with more than 80,000 miles of pipelines and 180 terminals. (In January, its CEO noted that the company moved a record amount of natural gas -- "a third of all the natural gas consumed in the United States during that month.") Like National Oilwell Varco, it, too, sports a massive book of orders -- its five-year backlog of currently identified growth projects totals $15 billion.
It's worth noting that there's actually a family of Kinder Morgan companies, and one of the others might better suit your preferences. Analysts at Credit Suisse have suggested that Kinder Morgan might do well to merge with one of its counterparts.
Bulls admire Kinder Morgan's revenue growth, growing profit margins, and healthy return on equity, among other things. The long-term picture remains promising for Kinder Morgan, but bears are reasonable to suggest that it has grown so large that its growth rate will likely slow. Still, its last earnings report suggested that the slowdown hasn't happened yet, with revenue surging 37% over year-ago levels. Kinder Morgan's dividend recently yielded 4.7% and it's worth consideration for your portfolio.
The big picture
It makes sense to consider adding some energy stocks to your portfolio. You can do so easily via an ETF. Alternatively, you might simply investigate an ETF focused on energy stocks and then cherry-pick from its holdings after doing some research on your own.