The Oilprice.

com Guide to Making Money and Avoiding Risk with

Hotter-Than-Ever Energy ETFs

Energy ETFs are your ticket into the broader energy How you get paid
marketthats why theyre such a hot item. For the rst time
What to look for in an ETF
ever, the average investor has access to massive, diversied
oil and gas portfolios. You cant get this from playing individ- And the advantages and disadvantages of going

ual stocks, and when it comes to mutual fundsyou dont with an energy ETF

even get to see everything youre investing in. On a less technical level, we will also take you through the

But while these transparent and easily accessible invest- risks:

ment tools can land you some mouth-watering energy How the risks compare among various types of
assets, they are evolving by the day and along with that energy ETFs
evolution, the complexities are piling up.
How to nd out what the risks are
Warren Buffets famously simple advice applies here as well:
How to determine which ETF is right for you in
Never invest in a business you cant understand.
terms of risk
There is a price to be paid for this impressive growth,
On a broader level, we will:
though: ETFs are becoming increasingly complicated and
with so many to compare and contrast, the average investor Give you the ammunition you need to nd whats
will nd it challenging to nd the right fund. Even nancial right for you
advisors have a hard time keeping pace, and they must
Share some research tools that can help you keep
constantly re-educate themselves or risk getting lost in the
pace with this dynamic playing eld
chaos and take their clients down with them. This is a contin-
ual game of catch-upand that is the number one point you
need to take home with you today. Part I: Understanding Energy ETFs

In this special report we will give you the context and back- First, lets go over the basics with a broad brush so you have

ground you need to understand: the necessary context to start with, then well get into the
raw details that can help you to decide whether an energy
What ETFs are
ETF is for youand, if so, how to get there successfully.
How they work
What Are ETFs?
How they are structured
An Exchange-Traded Fund (ETF) trades just like a common
The various types of ETFs stock on a stock exchange. ETFs are marketable securities

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 Making Money & Avoiding Risk with Hotter-Than-Ever Energy ETFs
that track an index, commodity, bonds or a basket of
assets. How do they differ from mutual funds? Well, they are
similar in nature, but what is important for investors to know
here is that ETFs are generally more protable: They tend to
enjoy both lower fees and higher daily liquidity. They are also
increasingly more attractive than mutual funds because,
while mutual funds have a net asset value (NAV), which is
calculated at the end of each day, ETFs do not, but well get
into this in more detail further down in the report.
What are Energy ETFs?
There are hundreds and hundreds of ETFs out there, and
energy is but one category of ETF. The term energy
encompasses a rather wide range of ETFs, and can include
funds that focus on the following:
Oil and gas exploration
Production, distribution and retail sale of gas and rened
oil products
Alternative energy production
Electric utilities
Nuclear energy and coal
How is an ETF Created?
If youve never played around with ETFs before, under-
standing them can seem a bit overwhelming, so we will try
to put this primer into language that is easy for the average
investor to understand.
The rst thing to understand is that ETFs are securities
certicates that essentially give the bearer of those certi-
cates the legal right of ownership over part of a basket of
assets, or in other words, of individual stock certicates.
This is the key to understanding how they are created and
how they are structured.
Authorized Participant Usually a large institutional
investor or broker-dealer, an authorized participant
enters into a contract with an ETF to allow it to create
or redeem shares directly with the fund. The authorized
participant is reimbursed through the issuance of a
large block of ETF shares (25,000-200,000 shares),
called a 'creation unit', which can then be sold in parts
or in total on the stock exchange.
Creation Basket A specic list of names and quanti-
ties of securities or other assets that may be
exchanged for shares of the ETF. The creation basket
typically either mirrors the ETE's portfolio or contains a
representative sample of the ETF's portfolio. The
contents of the creation basket are made publicly avail-
able on a daily basis.
First, before an ETF is created, a fund managerwho is the
primary backer of the ETFmust submit to the US Securi-
ties and Exchange Commission (SEC) a detailed plan for
how the fund will operate. Once the fund is approved and
given permission to proceed, ETF shares can be created.
These funds can realistically only be managed by the largest
institutional money management rms with indexing experi-
ence, such as Vanguard Group and Barclays Global Inves-
tors. These large rms have experience directing massive
pension funds that hold impressive global baskets of stocks
and they are usually the only ones who can loan the stocks
necessary for the creation of an ETF. Beyond this, they also
have the power to create demand for a new ETF.
The simplest explanation of the process of creating ETF
shares is that an authorized participanttypically a large
institutional investordeposits a daily list of names and
quantities of securities or other assets (a creation basket), or
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 Making Money & Avoiding Risk with Hotter-Than-Ever Energy ETFs
ETF or ETN? Do You Know the Difference?
You already know what an ETF is, but you might not
have heard of its cousin, the exchange-traded note, or
ETN. The two relatives are similar by design in that they
both track assets, have lower expense ratios than
mutual funds and trade on exchanges like stocks.
What sets them apart is this: An ETN is more like a
bond, which can be held to maturity or freely bought
and sold. Because this is an unsecured debt note
issued by an institution, if the underwriter goes bank-
rupt, you lose your shirt.
cash, with an ETF. This creates ETF shares. These shares
travel through the same agency that records individual
stock sales and keeps ofcial transaction recordsthe
Depository Trust Clearing Corpwhich helps ensure
against potential fraud. After this, ETF shares can be sold
and resold on the open market. This is called redemption.
Creation basket
and/or cash Hold shares
Authorized
Fund or Trust Investors
Participant
One creation unit Trade on an
(eg. 50,000 shares of an ETF) Exchange
Motivators: The Players in This Game
Player 1: The Authorized Participant
The Authorized Participant is the one who has the most
prot motivation here. The Authorized Participant is motivat-
ed by the prots that are derived from the difference in price
between the creation basket of stocks and the ETF, as well
as by the bid-ask spread of the ETF.
Player 2: The Fund Manager
The fund manager is motivated through a fee that comes in
the form of a small portion of the annual assets of the ETF.
This fee will be clearly set out in the ETFs prospectus, which
all investors should read very carefully, and preferably with
help from a legal/nancial advisor.
Player 3: Stock Loaners
Those investors who loan the stocks that comprise the ETFs
creation basket will make their money by way of small
interest fees.
Player 4: The Custodial Bank
The Custodial Bank will also earn a small portion of the
funds assets. This typically comes out of the funds man-
agement fees, distributed by the fund manager.
Part II: The Endless Task of Categorizing Energy ETFs
Do not waste your time trying to categorize the hundreds
and hundreds of Energy ETFs out there. You will nd that a
number of analysts and institutions have already done
thisand no ones categories are the same. We have cate-
gorized them for you here to save you time, and ours, will
also differ from other categorizations out there. Still, this is
necessary as a starting pointfor you to decide which ETF
might be most suited to your investment desires.
We will start with ve basic categorizations into which all
energy ETFs should fall in terms of size, scale and diversity.
1. Single-Contract Energy ETFs, in which futures contracts
deal only with one energy commodity
2. Multi-Contract Energy ETFs, which are broader because
they hold futures contracts tracking more than one energy
commodity.
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 Making Money & Avoiding Risk with Hotter-Than-Ever Energy ETFs
3. Bearish ETFs, in which you are put on a short position as
if you are selling an ETF. These are also called Inverse ETFs,
or Short ETFs. What this really means is that they are prot-
able for investors when the market is in a state of decline,
and they are used as hedges against long positions when
the market is weak.
4. Bullish ETFs, or Ultra-Long ETFs, are the opposite of
Bearish, Inverse, or Short ETFs. Bullish ETFs include Lever-
aged ETFs, Ultra ETFs and UltraPro ETFsand daily returns
here can be double what they are for Bearish ETFs. Bullish
ETFs are day-traded, rather than traded long.
Popular Single-Contract Energy ETFs
iPath S&P GSCI Crude Oil Total Return Index (ETN),
provided by Barclays iPath, tracks only oil
PowerShares DB Oil Fund (DBO)
Popular Multi-Contract Energy ETFs
PowerShares DB Energy ETF (DBE), provided by
PowerShares, tracks everything from crude oil and
natural gas to heating oil, gasoline and others.
Popular Bearish Energy ETFs
MacroShares $100 Oil Down ETF (DOY), which
inversely tracks the spot price of West Texas Interme-
diate light, sweet crude oil (WTI)
Daily Energy Bear 3x Shares (ERY)
Popular Bullish Energy ETFs
Energy Bull 3X-Triple Leveraged ETF (ERX)
MacroShares $100 Oil Up ETF (UOY), which does
the exact opposite of DOY
Contango
This is when current future prices are lower than
contracts reecting what prices could be a year from
now. ETFs based only on current prices lose money if
a market is in contango. Why? Because they have to
buy the higher-priced, longer-dated contract and sell
the cheaper spot month. They sell low and buy high.
While all ETFs will fall into one of the four aforementioned
categories, with quite a lot of overlap between single- and
multi-contract ETFs, and Bearish and Bullish, these are the
how to invest categories. These ETFs can be further subdi-
vided into the following categories, when you need to deter-
mine what to invest in, exactly:
Futures-Based Energy ETFs
Energy ETFs that track energy commodity prices and hold
futures contracts are an easy way to gain exposure to the
energy sector, but there are inherent risks hereespecially
for investors who might panic during price uctuations.
These ETFs only buy futures contractsthey dont buy oil
and gas. They simply roll their futures contracts. When one
is about to expire, it is sold out bit by bit and replaced with
futures that will expire the next month. Trading prices will be
different each time.
Where it gets a bit slippery here is that these ETFs are
designed to track markets over lengthy periods, but since
their inception they have often only succeeded over short
periods.
Broad-Based Energy ETFs
Broad-Based Energy ETFs are multi-contract funds that
track the energy industry with a wider sweep. Here, you get
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 Making Money & Avoiding Risk with Hotter-Than-Ever Energy ETFs
exposure to multiple types of energy, which can include oil
and gas or alternative energy.
These ETFs are also for investors who want to play the
longer-term game, but dont want to put all of their eggs in
one basket. These ETFs offer diversity that allows you to play
multiple games at once. In our categorization, these ETFs
hold shares of energy companies instead of physical com-
modities.
These are probably the most popular energy ETFs because
they afford an investor indirect exposure through stocks.
Big Oil Energy ETFs
There will necessarily be some overlap here with the cate-
gorizations, but quite simply, these are ETFs that focus on
the supermajorsthe big players in the oil industry. Expo-
sure will vary depending on how the funds are weighted,
Broad-Based Energy ETFs
Energy Select Sector SPDR XLE; a fairly low-
risk/lower-reward investment
Vanguard Energy ETF (VDE A+)
First Energy Trust AlphaDEX Fund (FXN B+)
PowerShares Dynamic Energy Sector Portfolio
(PXI A-)
Rydex S&P Equal Weight Energy ETF (RYE B+)
Market Vectors Oil Services (OIH); a higher-risk,
higher reward investment
Shares U.S. Oil & Gas Exploration & Production (IEO);
also high-risk/high-reward
PowerShares DB Energy Fund (DBE A)
Energy ETFs
AXEN (iShares MSCI ACWI ex U.S. Energy ETF)
DBE (PowerShares DB Energy Fund)
DBO (PowerShares DB Oil Fund)
DKA (WisdomTree International Energy Sector ETF)
EEO (EGShares Emerging Markets Energy ETF)
EMEY (iShares MSCO Emerging Markets Energy ETF)
EMLP (First Trust North American Energy ETF)
ENY (Guggenheim Canadian Energy Income ETF)
FCG (First Trust ISE Revere Natural Gas Index)
FILL (iShares MSCI Global Energy Producers ETF)
FRAK (Unconventional Oil & Gas ETF)
FXN (First Trust Energy AlphaDEX Fund)
HAP (Natural Resources ETF)
IEO (iShares US Oil & Gas Exploration & Production ETF)
IEZ (iShares US Oil Equipment & Services ETF)
IGE (iShares North American Natural Resources)
IPW (SPDR S&P International Energy Sector ETF)
IYE (iShares U.S. Energy ETF)
IXC (iShares Global Energy ETF)
KOL (Coal ETF)
MLPA (MLP ETF)
MLPJ (Junior MLP ETF)
OGEM (EGShares Energy GEMS ETF)
OIH (Oil Services ETF)
PKOL (Global Coal Portfolio)
PSCE (PowerShares S&P SmallCap Energy Portfolio)
PXE (PowerShares Dynamic Energy Exploration)
PXI (PowerShares DWA Energy Momentum Portfolio)
PXJ (PowerShares Dynamic Oil & Gas Services ETF)
RYE (Guggenheim S&P 500 Equal Weight Energy ETF)
VDE (Vanguard Energy ETF)
XES (SPDR S&P Oil & Gas Equipment & Services ETF)
XLE (Energy Select Sector SPDR Fund)
XLES (S&P SmallCap Energy Portfolio)
XOP (SPDR S&P Oil &Gas Exploration & Production ETF)
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 Making Money & Avoiding Risk with Hotter-Than-Ever Energy ETFs
but some of the most popular Big Oil Energy ETFs include:
United States Oil Fund (USO A)
PowerShares DB Oil Fund (DBO A-)
United States 12 Month Oil Fund (USL A+)
Small-Cap Energy ETFs
This is where it gets more interestingand certainly more
volatile. These are ETFs that target only the small-cap
energy companies, excluding the big players. Again, Power-
Shares is one of the most popular, with its PowerShares S&P
SmallCap Energy Portfolio (PSCE B-).
Emerging Market Energy ETFs
This is the easiest way to gain exposure to energy in emerg-
ing markets, by tapping into major energy companies
controlling key venues in Africa, Asia and Latin America,
but investing in a singular-targeted ETF is a big risk if you
dont have a very clear grasp of both global oil markets and
geopolitics (and few are prophetic enough to play this
game well).
Some singular targets that represent high-risk exposure
include:
China Energy ETF (CHIE C)
Market Vectors Russia ETF (NYSEARCA:RSX)
Some broader-based emerging market energy ETFs who
cover more in their basket and thus de-risk exposure a bit,
include:
iShares MSCI Emerging Markets Energy Sector Capped
Index Fund (NASDAQ:EMEY)
EGShares Energy GEMS ETF (NYSEARCA:OGEM)
These broader funds will include everyone from Russian
Gazprom and Brazilian Petrobras to Chinese giants Petro-
China and CNOOC. At any given time, exposure to these
emerging market giants might be very risky, but the trick is in
how the funds are mixed up and weighted.
Master Limited Partnership (MLP) Energy ETFs
A lot of investors will probably nd this ETF segment quite
attractive, if not complex. After all, in order to get their tax
benets, MLPs are obliged to distribute a lot of their current
earningsso, for the investor looking for quick gains, these
types of ETFs tend to offer very nice distribution yields.
First things rst: MLPs are limited partnerships that are
traded on major exchanges, which in turn means that they
have the tax benets of a Limited Partnership plus the
liquidity of a publicly-traded company. This is a great com-
bination.
Exploration & Production ETFs
ETFs that focus solely on oil and gas exploration and
production offer investors much narrower exposure to
energy, but the exposure is more direct. Investors will benet
here when the E&P companies make a new discovery or
when oil and gas prices climb, but the inverse is also true.
Some key Exploration & Production ETFs include:
SPDR S&P Oil & Gas Exploration & Production ETF
(XOP A)
iShares Dow Jones U.S. Oil & Gas Exploration & Produc-
tion Index Fund (IEO A)
PowerShares Dynamic Energy Exploration & Production
Portfolio (PXE A-)
Oil & Gas Equipment & Services ETFs
These ETFs focus on the oil services industrythose who
provide the services and equipment to the explorers and
producers, which means that their fate will move along with
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 Making Money & Avoiding Risk with Hotter-Than-Ever Energy ETFs
the fate of the E&P and, at the end of the day, oil and gas
prices.
Under this category, you will nd:
Market Vectors Oil Services ETF (OIH A-)
iShares Dow Jones U.S. Oil Equipment & Services Index
Fund (IEZ)
SPDR S&P Oil & Gas Equipment & Services ETF (XES A-)
PowerShares Dynamic Oil & Gas Services Portfolio
(PXJ B-)
Unconventional Oil & Gas ETFs
These ETFs are focused entirely on getting unconventional
oil and gas out of the ground. That means shale, tight oil,
tight gas and oil sandsanything thats not conventional. It
also means they focus on unconventional processes, such
as hydraulic fracturing and directional drilling (horizontal
drilling). Under this category, the pioneer is Market Vectors
Unconventional Oil & Gas ETF (FRAK), sponsored by Van
Eck Global, which sponsors dozens of other ETFs as well.
Clean Energy/Alternative Energy ETFs
This is a really broad sub-set of energy ETFs that can also
focus on more than one commodity. These will include wind,
solar and geothermal.
Key among these ETFs will be:
Market Vectors Global Alternative Energy ETF
PowerShares Clean Tech Portfolio
Or some more narrowly focused options:
First Trust Global Wind Energy ETF (FAN)
PowerShares Global Wind Energy ETF (PWND)
Market Vectors Solar Energy ETF (KWT)
Claymore Mac Global Solar Energy ETF (TAN)
Gasoline ETFs
Not to be confused with natural gas ETFs, there are even
ETFs that focus solely on gasoline. A popular investment
under this category is the United States Gasoline ETF (UGA).
Nuclear Energy ETFs
Finally, while there are endless ETFs-and more popping all
the time, requiring even more categories, were going to cut
it off here, with our nal entry: nuclear energy. Whether you
should invest in nuclear energy depends on where you stand
theoretically: this is a play that requires predicting the future
balance between fossil fuels, alternative energy and nuclear
energy. If youre willing to take the gamble that nuclear is still
here to stay for some time, then there are a few funds that
stick out:
iShares S&P Global Nuclear Energy Index ETF (NUCL)
Market Vectors Uranium+Nuclear Energy ETF (NLR)
Global X Uranium ETF (URA)
Part III: WHAT to Look for, and WHY
Total Cost to YOU
Expense Ratios, Commissions & Bid-Ask Spreads
The very rst thing we look at once weve decided to go with
an Energy ETF and know which kind were looking for is the
expense ratio. It is, after all, this expense ratio that makes
ETFs more attractive than mutual funds. Expense ratios
affect your bottom line.
Keep this in mind, though: While ETFs are generally lauded
for their comparatively lower expense ratios, not all ETFs are
equal and there are some major differences in expense
ratios out there.
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 Making Money & Avoiding Risk with Hotter-Than-Ever Energy ETFs

The expense ratio is the annual fee that ETFs charge their The four biggest energy ETFs are:
shareholders. Essentially, this is a percentage of assets
Vanguard Energy ETF (VDE)
deducted each scal year for fund expenses. These fund
Expense Ratio: 0.12%
expenses can include management fees, administrative
fees, operating fees or any other asset-based costs the ETF Energy Select ETF (XLE)

has to pay. Expense Radio: 0.15%

The average expense ratio for energy ETFs is around 0.47%. iShares Dow Jones Energy ETF (IYE)

So, lets take a look at the four biggest energy ETFs out there Expense Ratio: 0.45%

to see how they compare in terms of expense ratios.
Gross Expense Ratio
This applies only to the fund, not to the investor.
Net Expense Radio
This is the amount you, the investor, pays for operating
costs.
Expense Waiver
The percentage of costs a fund sponsor is willing to
absorb to keep the funds net expense ratio low.
S&P Oil & Gas Exploration & Production ETF (SPDR)
Expense Ratio: 0.35%
So from a strictly expense ratio standpoint, the Vanguard
ETFthe brainchild of Jack Bogleis the cheapest, even
though it tracks the same type of assets as XLE (issued by
State Street SPDR) and SPDR (also issued by State Street).
iShares, issued by BlackRock, is the most expensive.
Here is a broader comparative look at expense ratios, start-
ing with the cheapest ETFs:

Name Symbol Expense Ratio Inception

Vanguard Energy ETF TIDE 0.12% 2004
MSCI Energy Index ETF FENY 0.12% 2013
Energy Select Sector SPDR XLE 0.15% 1998
S&P SmallCap Energy Portfolio PSCE 0.29% 2010
SPDR S&P Oil & Gas Equip & Service ETF XES 0.35% 2006
iShares MSCI Global Energy Producers ETF FILL 0.39% 2012
S&P Equal Weight Energy ETF RYE 0.40% 2006
SPDR S&P International Energy Sector ETF IPW 0.40% 2008
iShares U.S. Oil Equipment & Services ETF IEZ 0.43% 2006
Market Vectors Unconventional Oil & Gas ETF FRAK 0.54% 2012
Market Vectors Coal ETF KOL 0.59% 2008
ISE-Revere Natural Gas Index Fund FCG 0.60% 2007
Dynamic Oil Services PXJ 0.62% 2005
Dynamic Energy E&P PXE 0.65% 2005
China Energy ETF CHIE 0.65% 2009
DWA Energy Momentum PXI 0.66% 2006
MSCI Emerging Markets Energy Sector Capped Index Fund EMEY 0.67% 2012
Canadian Energy Income ETF ENY 0.70% 2007
IQ Global Oil SmallCap ETF I0IL 0.75% 2011

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 Making Money & Avoiding Risk with Hotter-Than-Ever Energy ETFs
Ok, so youve found an energy ETF with a comparatively low
expense ratiobut there are other costs that you could incur
and you need to know what they will all be beforehand.
Beyond the expense ratiowhich is a good starting
pointthere will likely be other fees and costs associated
with trading.
At the end of the day, your total costs may also include:
Commissions: The cost of commissions in the form of
trading fees is something a more active investor will really
need to consider carefully. The more active an investor
you are, the more commission fees you will incur. But
there is some good news here: Again, not all ETFs are
equal, and some of them offer commission-free trading.
This can change, so youll have to do your homework.
Bid-Ask Spreads: This is where it gets more complicat-
ed for new investors who havent dabbled in the stock
market before. Lets break it down. There are two parts to
this spread: 1) Bid: the price someone is willing to pay for
an ETF, and 2) Ask: the price someone is willing to sell it
for. The spread is the difference. Bid-ask spreads for
most ETFs are pretty negligent, largely because an ETF
typically trades close to its NAV (net asset value). Howev-
er, you need to watch out for those with signicant
spreads, and these will most often be the ETFs that have
low volumes, but low-liquidity ETFs can also have a higher
bid-ask spread. Remember, a wide bid-ask spread will
negatively affect your prots. Even some thinly traded
ETFs can have wide bid-ask spreads with liquid stocks. At
the end of the day, the wider the spread, the bigger your
upfront loss when you buy the ETF.
Exposure Depth & Diversication
The best way to de-risk your ETF investment is to go with a
diversied, broad-based fund. In fact, this is one of the most
attractive aspects of the ETFthey can give investors imme-
diate, diversied exposure to the energy industry. When you
are comparing these diversied ETFs, you will want to
consider concentrationhow many of its assets are actually
in the top 10. Again, you need to dig deeper into the individ-
ual holdings to get a better idea. The ETF itself is just a
storage container.
But, once youve landed on a diversied ETF, what you really
want to look for is how deep their exposure actually goes.
This is where the real difference comes into play. Just
because one ETF has more holdings than another doesnt
mean its better. When you want to understand the depth of
exposure you need to look carefully at the ETFs ticker page.
This page tells you how many securities the ETF has
because, while one may have more holdings than another,
some of those holdings may be grouped into securities, so
the numbers arent necessarily painting the whole picture.
Consider this by way of example when you are trying to
choose the right energy ETF: S&P Oil & Gas Exploration
SPDR ETF (XOP), to which we have referred earlier in this
report, is considered to be slightly riskier some of its peers
because it is more levered to oil prices and hence more
sensitive to commodity ups and downs.
And if you insist on focusing on futures-based ETFs, we will
assume that you fully understand commodities; otherwise,
this is a very difcult realm to navigate. What we have found
is that while futures-based energy ETFs are a great way to
gain exposure to these assets that you might not otherwise
have, many investors simply plunge in without understand-
ing how they workand without doing their homework.
There are layers and layers of factors that will inuence how
these futures-based commodities will perform, and the
connections between these layers and the overriding cause
and effect remain elusive even to the best minds out there.
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 Making Money & Avoiding Risk with Hotter-Than-Ever Energy ETFs

Liquidity
Its no easy task to sort through what ends up being over a
thousand ETFs out there on the market. If you entrust this
task to a nancial advisor, it will save you time, but our expe-
rience is that nancial advisors can sometimes miss the
mark on liquidity for ETFs. Just because an ETF is small
does not necessarily mean it doesnt have liquidityso you
might miss out on a good opportunity when your nancial
advisor weeds out all the smaller funds through a crass lter
that has good intentions but is sort of one-size-ts-all. If you
really want to determine an ETFs liquidity, you should look at
it more closelyat the stocks that make up its creation
basket. And liquidity is, well, uid. A small ETF could, at any
time, create new shares that are liquid. Think of it this way:
An ETF is a collection of smaller pictures making up the big
picture and if you look only at the big picture you might miss
a lot. The bottom line is this: dont look at the liquidity of the
ETFlook at the liquidity of the underlying holdings.
Distributions & Yield
Is your choice of ETF efciently managed in terms in terms of
distributions? To determine this you must review the distribu-
tion history of the ETF. What you are looking for here is
whether any capital gains distributions have been made. If
there havent been any capital gains distributed in recent
times this is a positive for the investor.
And when it comes to yield, you will want to check out the
funds 30-day history with the US Securities and Exchange
Commission (SEC)but this is traditionally made easier for
you by going directly to the funds website.

Lets Recap: Advantages & Disadvantages

Disadvantages of an ETF
More Expensive Than Straight Stock
While ETFs will be cheaper than mutual funds, when you compare them to simply investing in a specic stock, the costs are often
higher because with a stock you don't have to pay the fund management fees through the expense ratio.
High-Risk With Leveraged ETEs
If you're looking at ETFs that are double or triple leveragedyou could also be looking at more than double or triple losses. These are
highly speculative. Leveraged ETFs are really only for day-tradersand gamblers.
Dividends Aren't Always High
Some dividend-paying ETFs don't pay high yields and focus instead on dividend consistency.
Intraday Pricing, Questionable Benets
For the longer-term investor, the intraday pricing of ETFs might be too much. When prices change throughout the day, there will be
little benet to the longer-term investor. It also produces irrational fears among investors who can't take the intraday price swings.
Plenty of Pitfalls
While ETFs make it very easy for investors to gain access to the broader energy market, it is still a complex world to navigate. The rule
of thumb here should be this: If you can't understand a specic ETF and the risks involved after you've looked over the prospectus
thoroughly, then don't do it without help.
Dangerous Dynamics
ETFs are evolving rapidly, and what they look like today might not be what they look like tomorrow. They are becoming hugely popular
and as they do so, they become more confusing.

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 Making Money & Avoiding Risk with Hotter-Than-Ever Energy ETFs

Advantages of an ETF
Instant Diversication
ETFs have the advantage over stocks in that they offer the investor a great opportunity to de-risk and gain increased exposure to the
energy sector through instant diversication. This is much better than trying to buying various different ocks to diversify on your own.
This is much more serious protection against volatility.
Good Performance
There is an almost bullet-proof path to performance here because most ETFs are indexed, rather than actively managed in the way
that mutual funds are.
No Risk of Issuer Default
The investor is not threatened by credit risk to the issuer because ETFs are not debt instruments.
Tax Efciency
By comparison to mutual funds, ETFs are much more tax efcient for investors. From a tax perspective, the treatment of istributions
is much more favorable. In fact, investors are allowed to pay accumulated capital gains taxes at the nal sale of he ETF. So the biggest
difference here is that you get to wait until you sell your ETF to pay taxes, which adds extra value to your money, which earns invest-
ment returns. Please note, however, that inverse and leveraged ETFs are more complex and ay be treated differently, so be sure to
check with your nancial advisor before you commit if tax efciency is one of the ain reasons you are considering an energy ETF.
Low Expense Ratios
Much lower than mutual funds, which is one of the most appealing aspects of the ETF. While mutual funds can see expense ratios in
the neighborhood of 2.0%, energy ETFs range from 0.12% to 0.75% typically.
No Minimums & Trading Flexibility
Energy ETFs don't have any investment minimums (unlike Index Funds). You can buy or sell them however you want, even one share
at a time. You have much greater trading exibility, with the option for short-selling and with pricing throughout the day.
Doesn't Get More Transparent Than This
It's hard to nd an investment door into the energy industry that is more transparent than an ETF. As an investor, you can e everything
you need to see (unlike with mutual funds)all the securities an ETF holds are right there for the naked eye.

Energy ETF Resources
ETFs are highly transparent. As an investor you can get all
the information you need on an ETF from the funds website,
fact sheet and prospectus. You can track everythingall the
time. What this means is that the responsibility is all yours. If
you lose your shirt, its because you didnt do your home-
work, not because you were scammed. In addition to every-
thing weve explained in this report, here are some additional
tools you will need to make sure you know what youre
getting into.
The ETF Handbook, by David J. Abner (For the very ser-
ious-minded, this handbook is a very deep guide to abso-
lutely everything you need to know about ETFs from a techni-
cal standpoint. Its intended audience is the nancial advisor
and institutional investor, and this fact speaks volumes about
how difcult it can be to navigate the ETF world).
The ETF Database (ETFdb) Screener helps you to narrow
down leveraged and inverse options for commodities and
energy equities. This tool gives you access to detailed
information on US-listed ETFs.
Zacks ETF Rank tool helps investors choose the ETF best
suited to their investment goals. It ranks by asset classes,

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 Making Money & Avoiding Risk with Hotter-Than-Ever Energy ETFs

expense ratios and bid-ask spreads. This is the key tool you should rely on to determine if a
specic ETF is right for you.
ETFReplay.com allows investors to research, analyze and
back-test ETFs to develop a strategy for gaining exposure
and avoiding drawdowns. Ask these questions:

These are all very useful tools, but be sure to read every Do the investment objectives line up with your
potential ETF prospectus regardless. A typical prospectus own? But rst, do you actually HAVE clear invest-
will be about ve pages long and will contain information on: ment goals?

Investment objective Do you understand the fees and expenses related

Fees and expenses to the investment? Is there a better option out there
Investment strategy that offers commission-free trading?
Principal risks, specic to the fund
Have you considered the specic risks related to
Performance
this ETF? Look at the prospectus of SPDRs S&P Oil
Portfolio management & Gas Exploration & Production ETF, for example,
Tax information which goes into great detail about risks (and we list
Payment to broker-dealers & other nancial intermediaries fewer than half of them here):

Passive Strategy/Index Risk: The Fund is managed with a passive investment strategy, attempting to track the perfor-
mance of an unmanaged index of securities. This differs from an actively-managed fund, which typically seeks to outper-
form a benchmark index. As a result, the Fund may hold constituent securities of the Index regardless of the current or
projected performance of a specic security or a particular industry or market sector. Maintaining investments in securities
regardless of market conditions or the performance of individual securities could cause the Funds return to be lower than
if the Fund employed an active strategy.

Index Tracking Risk: While the Adviser seeks to track the performance of the Index as closely as possible (i.e., achieve
a high degree of correlation with the Index), the Funds return may not match or achieve a high degree of correlation with
the return of the Index due to operating expenses, transaction costs, cash ows, regulatory requirements and operational
inefciencies. For example, the Adviser anticipates that it may take several business days for additions and deletions to the
Index to be reected in the portfolio composition of the Fund.

Oil and Gas Sector Risk: The Funds assets will generally be concentrated in the oil and gas exploration and production
industry, which means the Fund will be more affected by the performance of the oil and gas exploration and production
industry versus a fund that is more diversied. Companies in the oil and gas sector develop and produce crude oil and

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 Making Money & Avoiding Risk with Hotter-Than-Ever Energy ETFs

natural gas and provide drilling and other energy resources production and distribution related services. Stock prices for
these types of companies are affected by supply and demand both for their specic product or service and for energy
products in general. The price of oil and gas, exploration and production spending, government regulation, world events
and economic conditions will likewise affect the performance of these companies. Correspondingly, securities of compa-
nies in the energy eld are subject to swift price and supply uctuations caused by events relating to international politics,
energy conservation, the success of exploration projects, and tax and other governmental regulatory policies. Weak
demand for the companies products or services or for energy products and services in general, as well as negative devel-
opments in these other areas, would adversely impact the Funds performance. Oil and gas exploration and production
can be signicantly affected by natural disasters as well as changes in exchange rates, interest rates, government regula-
tion, world events and economic conditions. These companies may be at risk for environmental damage claims.

Non-Diversied Investment Risk: The Fund is non-diversied and may invest a larger percentage of its assets in securi-
ties of a few issuers or even a single issuer than that of a diversied fund. As a result, the Funds performance may be
disproportionately impacted by the performance of relatively few securities.

Energy ETFs: The Final Word
The overriding question here is not really whether ETFs are a
good thing or not; the question is whether they are right for
YOU. ETFs have stormed on to the scene quite aggressive-
lyand they were very welcome because they gave us the
means to gain wide exposure to the energy industry very
easily. The risks, as we have clearly demonstrated, are quite
well stated even on the prospectus of the ETFand these
risks are laid out specically for the fund; they are not broad,
general risks.
Despite the raging popularity of energy ETFs from the onset,
you will come across a fair amount of negative information
on the funds. One of the biggest fear-mongering rumors out
there has been that of ETF collapse. ETFs cannot collapse
and leave investors in the lurch. There are provisions that
require share redemptions to occur with settled shares
preventing this. While ETFs absolutely cannot collapse, they
can close. What does this mean, exactly? Closures are actu-
ally fairly regular. ETFs close down when they fail to generate
signicant interest from investors and drain cash from the
issuers. But when it closes down, your investment doesnt
simply disappearportfolios are gradually liquidated and
funds are returned to investors.
Most of this is misplacedand most of the problems have
been the fault of the investor, rather than the fund. Other
negative news has been put out there by mutual funds who
are losing out to competing ETFs.
This is why we continue to emphasize the need to be a
responsible investor and to absorb all the information that is
out there on the energy ETF of your choice. As we have
noted numerous times, ETFs are highly transparent, so
doing your homework is easy if not time-consuming. Its in

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 Making Money & Avoiding Risk with Hotter-Than-Ever Energy ETFs

your hands now, and we hope you will use the background
we have given you, along with the additional tools, to make
the most of your foray into the world of the energy ETF.
So at the end of the day, we think ETFs are a great way for
you to gain low-risk exposure to the energy sector and to do
it whether the oil and gas market is up or downdepending
on how you like to play it. We simply caution that this is a
dynamic playing eld, so you have to not only do your
research thoroughlybut you have to keep doing it. There
are so many to choose from and the trick is rst understand-
ing what you want to achieve and then nding the ETF that
can achieve it for you. Patience in this case is a critical virtue.
Whats Up Next?
Next month we have our experts take you through the
process of valuing an oil and gas company. If you want to
know if an oil and gas company you are interested in is
overvalueddont miss this report. We will discuss,
in-depth, the various metrics you can use for E&P valuation,
including multiples to cash ow, reserves values, value per
owing barreland much more. Not only will we explain all
these metrics and how to use them, but we will also demon-
strate the pros and cons of each in terms of E&P valuation
and how they all tie in. Make your next investment a sound
one with our oil and gas valuation expertise.

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