VDE - RSPG: Could Be The Energy Play Of 2024

2024-01-03 12:24:53 ET

Summary

• The Invesco S&P 500® Equal Weight Energy ETF is recommended for bullish investors looking for equal-weight exposure to the energy sector.
• The RSPG ETF holds a diversified portfolio of 24 energy stocks with equal weighting, reducing reliance on any single stock.
• The fund offers balanced diversification, potential for outperformance, and a dividend yield of around 2.87% in an undervalued energy sector.

I'm bullish on Energy on a relative basis, and also bullish on equal weighting more generally, given how outsized market-cap weight fund returns were last year. That means I'm bullish on equal weight Energy, which is why I like the Invesco S&P 500® Equal Weight Energy ETF (RSPG).

RSPG is an exchange-traded fund, or ETF, designed to track the performance of the S&P 500 Equal Weight Energy Plus Index. The fund uses a full replication strategy, meaning it aims to hold all the constituents of the index in equal proportions. With approximately $570 million in assets under management, RSPG is a mid-sized ETF that offers diversified investment in the energy sector.

ETF Holdings

The RSPG fund holds a diversified portfolio of 24 energy stocks, each with a similar weighting of approximately 4.4%. This equal-weight approach ensures that the fund's performance is not overly reliant on any single stock. Holdings in RSPG include:

1. Halliburton Co (HAL): An American multinational corporation, Halliburton is one of the world's leading providers of products and services to the energy industry.

2. Schlumberger NV (SLB): Schlumberger is the world's largest oilfield services company, providing technology for reservoir characterization, drilling, production, and processing.

3. APA Corp (APA): APA Corporation is an American petroleum and natural gas exploration company and one of the world's largest independent exploration and production companies.

4. Marathon Petroleum Corp (MPC): MPC is an American petroleum refining, marketing, and transportation company, making it one of the largest petroleum refiners in the United States.

5. Baker Hughes Co (BKR): Baker Hughes is an international industrial service company and one of the world's largest oilfield services companies.

Sector Composition and Weightings

The fund is primarily invested in the energy sector, with significant exposure to both large-cap growth and value stocks. The sector composition of RSPG is heavily tilted towards Oil, Gas & Consumable Fuels, representing the largest portion of the fund's portfolio. The remaining allocation is dedicated to Energy Equipment & Services.

Peer Comparison

In comparison to similar ETFs, such as the Vanguard Energy Index Fund ETF (VDE), RSPG stands out with its equal-weighted strategy. While VDE is heavily skewed towards its top two holdings, ExxonMobil (XOM) and Chevron (CVX), RSPG allocates approximately 4.4% to each stock. This strategy provides RSPG with a balanced diversification and potential for outperformance when smaller stocks in the sector perform well.

Pros of Investing in RSPG

Investing in RSPG offers several advantages. Firstly, the fund's equal-weighted strategy provides investors with more balanced diversification compared to a market-cap-weighted ETF. Secondly, the energy sector is currently undervalued with a high free cash flow yield, making it an attractive proposition for investors seeking growth potential. Finally, RSPG has a nice dividend yield of around 2.87%, offering some stability and income generation in an otherwise volatile sector.

Cons of Investing in RSPG

Despite the numerous benefits, investing in the energy sector and, by extension, in RSPG, also carries certain risks. The sector is heavily influenced by geopolitical conflicts, inflation, and the global shift towards sustainable energy sources, all of which can significantly impact the profitability of RSPG's holdings. Furthermore, the sector's notorious volatility may make it too unpredictable for very risk-averse investors.

Conclusion

The Invesco S&P 500® Equal Weight Energy ETF provides a unique investment opportunity in the energy sector. Its equal-weight strategy and dividend yield offer a compelling combination of growth potential and stability. However, given the inherent volatility of the energy sector, this investment should be considered as part of a diversified portfolio. Energy might do well in 2024, but more on a relative basis than an absolute one.

For further details see: