There is one singular reason that I invest in ETFs instead of mutual funds. That reason is transparency. I like the fact that I can look at an ETFs website and/or prospectus and in relatively short order know exactly what it will cost me (expense ratio), how much it will cost to buy and sell it (transaction costs) and what’s in it (holdings). As a new financial blogger, it was brought to my attention that I may not be transparent enough myself. Most folks probably haven’t heard of the PowerShares DWA Energy Momentum Portfolio ETF PXI, and definitely wouldn’t know why The Deep Value ETF Accumulator invests in it. That will be my purpose today; to look under the hood of PXI and discover why I see value in this ETF.
First of all, lets go straight to Invesco’s fact sheet and see what they have to say about PXI. There, you can see exactly what the fund’s objective is: “The Fund will normally invest at least 90% of its total assets in common stocks that comprise the index. The Index is designed to identify companies that are showing relative strenght (momentum), and is composed of at least 30 common stocks from the NASDAQ US Benchmark Energy Index. The Fund and the index are rebalanced and reconstituted quarterly.” I will interject here and explain why this rebalancing and reconstituting makes this ETF unsuitable for long-term investors who are not utilizing tax-advantaged accounts such as IRAs. This frequent rebalancing & reconstituting makes this ETF unsuitable for brokerage accounts if taxes are a big concern to you.
Since this ETF has frequent rebalancing & reconstituting and it has a turnover ratio of 119%, I would liken this ETF to an actively-managed mutual fund. Personally, I have nothing against active management, but, as I stated in the opening paragraph, I do not like the fee structure and opaqueness of most typical actively managed mutual funds. I like to know what I am investing into, what it costs to own it and what it’s track record has been. You will get that information upfront when purchasing PXI as opposed to buying an actively managed energy mutual fund. It is the track record of PXI that has intrigued me and convinced me to invest in it.
Now, onto the actual track record of PXI compared to the other top 2 energy ETFs (XLE & VDE). The Energy Select Sector SPDR ETF XLE is the eldest of these 3 funds with an inception date of December 1998. The Vanguard Energy ETF (VDE) has an inception date of September 2004. PXI was started in October 2006; so I present to you a back-test comparing all 3 head-to-head that also starts in October 2006.
Upon examining this chart, you may wonder why bother with an energy fund at all, when you could just own an S&P 500 index fund which beats the energy index funds and has energy companies in it. That is a good question and I hope the next chart helps to explain why I think these energy funds have great potential over the long haul. This chart compares the S&P 500 index fund with XLE all the way back to December 1998.Â
In addition to beating the S&P 500 index by over 3% CAGR (Compounded Annual Growth Rate), the energy index has a relatively low correlation of 0.62 to the overall US market. With a 3% CAGR outperformance over 18 years, PXI has the potential of beating the S&P500 by 67% in total returns while giving plenty of opportunites to use arbitrage with other non-correlated assets in your portfolio.
Next up is the holdings inside PXI. As I stated earlier, this fund has a high turnover rate, so these holdings may change drastically over time.
Most of these companies are smaller than those in XLE and VDE. You can readily see this if you look at a Morning Star style box. Â Typically over long periods of time, small cap indexes have been able to outperform large cap indexes.
The average trading volume on PXI is about 75k shares per day. This pales in comparison to XLE, but it is sufficient for long term investors.
With over 100 Energy related ETFs to pick from, it is my opinion that you would do well by choosing any of these 3 ETFs (XLE, VDE or PXI). Due to the significant outperformance of PXI, The Deep Value ETF Accumulator chooses PXI to invest in, in his IRA.
Thank you for taking time to read this article. The Deep Value ETF Accumulator, aka, Micah McDonald
Thanks to https://www.portfoliovisualizer.com/backtest-portfolio for the back-testing tools.
Thanks to https://www.scottrade.com/ for the ETF screening tools.
Thanks to http://etfdb.com/ for the ETF research tools.
Thanks to http://beta.morningstar.com/ for the research tools.