IEO iShares US Oil & Gas Exploration & Production ETF

Just when investors though that smooth sailing was on the horizon once again for the stock markets, geopolitical risks in Europe quickly materialized, and pushed equities back lower. The clash between Russia and Ukraine is now reaching crisis proportions, with the threat of war marching ever higher in the Crimean peninsula.  

American stocks were down about 1% on the news, while European equities were pushed even lower as a result. German and Italian markets saw a slump of more than 3%, while Russian securities crashed (such as the Russia ETF RSX), as the ruble tumbled and stocks in the nation lost about 10% on average.

Any Safe Havens?

While this new risk of war in Europe negatively impacted stocks by and large, the turmoil could actually be good news for some commodities. Gold in particular was a winner, though domestic oil and natural gas companies could benefit in the medium term if there is a prolonged struggle in Eastern Europe (see all the European Equity ETFs).  

After all, Russia is a huge supplier of both natural gas and oil, and Western Europe and other markets are heavily dependent on Russian production to fuel their economies. But if the crisis escalates further, Russia could either be hit with sanctions, or depending on how events play out, could freeze European markets out of its vast oil and natural gas supplies.

This will force oil higher and it may also push Western Europe to look to other markets in order to meet their energy needs. Oil prices are already up more than 2%, and a more energy hungry Europe could push prices even higher, potentially leading to a greater demand for both domestic production here in the U.S., or even LNG exports to our European allies in the medium term.

This is especially true if the crisis in Ukraine forces Western Europe to close their ranks and consider Russia as an adversary in the region. If this is the case, it will be vital for the region to wean itself off of the vast Russian hydrocarbon supplies and to get their energy from friendlier nations (see all the Energy ETFs here).

All of this bodes well for domestic oil and gas companies which could remain relatively unscathed by the crisis and may be longer term beneficiaries from the geopolitical shift. For investors seeking to make a broad play on oil and gas, an ETF approach could be the way to go at this time. This technique could help to spread risks around while still allowing for a broad play on the space.

How to Play

Below, we highlight three such ETFs that could benefit from the escalating tensions, and the rising energy commodity prices in the near term, any of which could be an interesting addition given the Crisis in Eastern Europe:

iShares U.S. Oil & Gas Exploration & Production ETF (IEO)

This ETF could be a top choice if investors want to focus on companies engaged in exploration and production activities. And since it only holds U.S. companies, exposure to Eastern European events should be limited (though not entirely eliminated thanks to the presence of some large caps).

The fund follows the Dow Jones US Select Oil Exploration & Production Index, holding about 75 companies in total. ConocoPhilips takes the top spot in the ETF, though EOG Resources and Phillips 66 round out the top three (read Are Oil Exploration ETFs Ready to Breakout?).

IEO has a bit of a focus on the exploration side, though companies in the broader integrated oil & gas category account for about 30% of assets too. The fund does cost 45 basis points a year in fees for its exposure, and it currently has a Zacks ETF Rank #1 (Strong Buy).

First Trust ISE-Revere Natural Gas Index Fund (FCG)

If you are looking for a concentrated play on natural gas production and exploration, FCG could be a great choice. This equal weight fund holds about 30 stocks in this corner of the market, and it could be an interesting long term play should LNG shipments eventually rise due to the Russian intervention in the Crimea. And in the short term, a brutal winter in the U.S. looks likely to keep prices elevated anyway, acting as a great catalyst even if the European crisis fizzles out.

Investors should note that the fund looks at four different factors in order to select companies, focusing on PE, P/B, ROE, and the correlation to natural gas futures. These ranks are averaged, and the top 30 stocks based on the final rank are included in the benchmark (see A Comprehensive Guide to Oil & Gas ETFs).

Due to this equal weight focus, large caps account for just under half of the portfolio, leaving nearly one-third of the fund for small and micro cap stocks. And once again, the U.S. dominates here, though there is a small holding in Canada and Norway as well.

PowerShares S&P SmallCap Energy Portfolio (PSCE)

If you are looking to avoid international holdings entirely in the energy space, PowerShares’ PSCE could be an interesting choice. The fund has a small cap focus, zeroing in on the S&P SmallCap 600 Capped Energy Index for exposure to about 30 domestic energy names.

Companies in this portfolio run the spectrum of the energy sector, with equipment (50%) taking the biggest chunk, followed by exploration/production (37%), and coal/alternative energy (7%) rounding out the top three. Due to the small cap focus though, the fund can see very volatile periods, while it isn’t the most popular on the list either.

Still, if you are looking to get in a variety of domestic energy stories with one ETF, this could be a great option. The space should continue to run, and if the energy pendulum swings back to the U.S. even further, these firms may become interesting M&A targets, or increasingly important to Western production demands.

Bottom Line

Tensions are really heating up in the Crimea, as Russian troops appear poised to take over the region. This threat of war—and the resulting rage from Western powers—is riling markets across the globe (also see Emerging Market ETFs: Any Bright Spots?).

While many stocks have been negatively impacted by this news, commodities have been a winner, with gold and energy commodities seeing gains. Companies that focus on energy commodities, and especially in Western-friendly nations, could be the real winners from this upheaval though, and the aforementioned ETFs that focus on the space could be the best ways to play the changing tides in Europe.

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FT-ISE R NAT GA (FCG): ETF Research Reports
 
ISHARS-US O&G (IEO): ETF Research Reports
 
PWRSH-SP SC EGY (PSCE): ETF Research Reports
 
MKT VEC-RUSSIA (RSX): ETF Research Reports
 
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