XOM - DRLL: Seems More Focused On Making A Statement Than Making Money

2023-05-30 10:43:16 ET

Summary

• Strive US Energy ETF is an energy index ETF with a focus on corporate governance practices.
• DRLL doesn't own enough of its holdings to have a meaningful impact in proxy votes and shareholder meetings.
• The ETF's expense ratio is higher than competitors, and there is no reason to believe it will be lower in the future.
• I rate DRLL a Sell because I think it is inferior to other energy index ETFs.

The best way I can describe Strive US Energy ETF (DRLL) is that it is a reverse ESG ETF. This ETF doesn't offer anything special besides its focus on being involved in corporate governance practices. However, it has a much higher expense ratio. I see no reason for anyone to hold this ETF unless they want to make a statement with their investment saying that they are against recent social pressure to move away from things like oil and fracking. It is not enough for me to recommend DRLL.

DRLL offers broad market exposure to the U.S. energy sector. DRLL has AUM of around $330M, making it a much smaller ETF than some of its peers, such as Vanguard Energy Index Fund ETF Shares ( VDE ) or Energy Select Sector SPDR Fund ETF ( XLE ). It is also a very new ETF, launched less than a year ago. DRLL's holdings and that of XLE are nearly identical.

DRLL does have one unique feature that separates it from other energy ETFs. The ETF's website claims that "through corporate governance practices, including voting proxy shares and proactively engaging with management teams and boards, Strive aims to unlock value in the U.S. energy sector by mandating companies to focus on excellence." I rate DRLL a Sell, because I require more than an anti-ESG stance to attract me to what is otherwise a more expensive version of XLE or VDE.

Holding Analysis

DRLL's holdings are nearly identical to a typical energy index. DRLL has an 89% overlap with VDE.

DRLL is market-cap weighted and holds 64 companies. Ignoring DRLL's corporate governance practices and looking at the ETF only for its holdings, there is a serious concentration issue. DRLLs top two holdings, Exxon Mobil ( XOM ) and Chevron ( CVX ) make up almost 40% of the AUM. DRLL's top 10 holdings account for about 65% making it hard for smaller companies to have any real impact on the ETFs return. This is not an issue only DRLL faces, but every market-cap weighted energy index. Because XOM and CVX dominate the energy industry, there is no reason to believe that in the near future, DRLL will become more diversified to the point where there is no concentration risk.

Corporate Governance Practices

In a video promoting DRLL , Strive, the asset management company that manages DRLL, claims that investment firms are using investors' money to "tell American energy companies to produce less oil and to frack for less natural gas." They go on to say that this can be stopped by "shareholders of these companies, by mandating them to drill more, to frack more, to do whatever allows them to be more profitable over the long run without worrying about these toxic political agendas in the boardroom and the way to do it is by buying DRLL."

The main problem I have with this is that DRLL does not seem to hold a large enough amount of any company to have a meaningful impact on proxy votes and shareholder meetings. Exxon Mobil is DRLL's top holding, accounting for around 22% of its AUM. If DRLL's AUM is $330M, then it owns about $72M of Exxon Mobil. Exxon Mobil's market cap is currently around $425B. This means that DRLL owns a grand total of under 0.02% of Exxon Mobil. DRLL's AUM would have to grow dramatically if it ever wants to be able to hold a meaningful enough amount to actually influence any of these companies. It definitely doesn't hold enough now, but I also don't believe it will in the future.

I also believe the amount of people who want to own an ETF like this is small. Most people have a positive or neutral view of becoming more environmentally friendly. 82% of Gen Z investors have exposure to ESG investments. As Gen Z gets older, they will likely invest more and more and if 82% of them are already investing in ESG funds, ESG funds' AUM will continue to grow and ETFs like DRLL will stay small.

Expense Ratio

Even if you agree with DRLL's mission to mandate companies to not give in to social pressure, there are reasons to still stay away from DRLL in favor of a typical energy index. One of these is the expense ratio. DRLL has an expense ratio of 0.41% while most energy indexes' expense ratio is 0.10%. This means that for every $1,000 invested, DRLL takes 41 cents and a typical energy index takes 10 cents. Although this doesn't seem like a big difference, in today's hyper-competitive ETF industry having an expense ratio 0.31% higher than a competitor is extreme. Also, over the long term having a higher expense ratio can really start to cut into returns.

In the future, I don't see any reason to believe that DRLL will lower its expense ratio. It makes sense for them to charge more because of their involvement in corporate governance practices. If they continue to engage in these activities, which are central to the ETF's purpose, they will have to keep charging this heavy expense ratio. Unless you really agree with DRLL's mission and are willing to sacrifice some returns to support that mission, there is no reason to pay extra for a fund that appears to be tracking the same thing.

Conclusion

When looking at DRLL's holdings, it appears to be just a typical energy index. But when you look deeper and you see its focus on mandating companies to not give into social and political environmental pressure and that these practices don't really have any influence, it seems to me like it's just a waste of money to choose it over a typical energy index ETF. The ETF shows no signs of becoming more successful in its corporate governance practices in my view, or making its expense ratio cheaper. Because of this, I rate DRLL a Sell.

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