A Closer Look at: iShares Dow Jones U.S. Energy (AMEX: IYE)

(2006-01-26) Fidelity Independent Adviser, Inc.

The iShares Dow Jones U.S. Energy Sector Index Fund jumped two spots up the ETF Momentum rankings last week and is currently one of top 5 ranked ETF funds. That level is nothing new for iShares Dow Jones U.S. Energy (Amex: IYE), which has seen its share values more than double over the last three years.

The iShares Dow Jones U.S. Energy Sector Index Fund jumped two spots up the ETF Momentum rankings last week and is currently one of top 5 ranked ETF funds. That level is nothing new for iShares Dow Jones U.S. Energy (AMEX: IYE), which has seen its share values more than double over the last three years.

The fund invests in a representative sampling of stocks that make up the Dow Jones U.S. Energy Sector Index, usually holding between 50 and 60 stocks. The index includes the energy in the Dow Jones U.S. Total Market Index and is weighted by market capitalization, meaning larger stocks receive larger representation.

Learn more about ETF investing and using Fidelity Independent Adviser’s ETF Momentum Tracker by visiting http://www.fidelityadviser.com/readMe_ETF.asp. Each week I will give you concise buy and sell recommendations for to iShares ETFs.

IYE is heavily concentrated and is currently focused on the largest of the large caps these days, integrated oil and gas firms. ExxonMobil, at more than one-fifth of the fund’s holdings, Chevron, and ConocoPhillips made up more than 42% of the fund’s portfolio on Jan. 19.

Rising demand, particularly in developing countries, and limited supply pushed oil prices up. Unrest in the Middle East then combined with hurricane-related issues to pump prices to multidecade highs. Profit margins and stock prices for the oil and gas producers, exploration and production companies, refiners and marketers, and equipment/service providers that dominate IYE’s portfolio rose with them.

Oil surged again in the last week, pushed by geopolitical concerns: a showdown with Iran over its nuclear program, which could result in economic sanctions and supply disruptions; and rebel attacks in Nigeria, which cut crude exports. On Monday, oil prices approached the $70-per-barrel mark, a high only previously reached on Aug. 30, 2005, the day after Hurricane Katrina roared across the Gulf Coast, disrupting U.S. refineries and production.

Learn more about ETF investing and using Fidelity Independent Adviser’s ETF Momentum Tracker by visiting http://www.fidelityadviser.com/readMe_ETF.asp or call (800) 548-3797. Each week I will give you concise buy and sell recommendations for iShares ETFs.

Can the oil companies keep the hot streak going? That’s impossible to know, and even after a three-year bull run, long-time energy investors are well aware of the sector’s volatility. Even during the current run, the fund has not been immune to quick falls.

Few expect anything more than a mild dip in energy prices over the near term. Forecasts call for average 2006 prices in the mid-$60s, and Goldman Sachs raised its forecast to $68.50 last week. The fund would likely benefit from continuing high prices.

Still, there are threats to oil stocks. The most basic is the continuing challenge to find new sources of oil and natural gas, a driver of high costs in the oil patch. Further, many companies will likely struggle to match earnings growth from 2005, which may disappoint investors. Finally, the industry may feel pressure from Capitol Hill, where congressional leaders have discussed windfall profit taxes that could sting the likes of ExxonMobil, Chevron, and other giants.

Learn more about ETF investing and using Fidelity Independent Adviser’s ETF Momentum Tracker by visiting http://www.fidelityadviser.com/readMe_ETF.asp or call (800) 548-3797. Each week I will give you concise buy and sell recommendations for iShares ETFs.


The fund’s history bears out its value as a portfolio diversifier. IYE carries an r-squared of 13 relative to the S&P 500, meaning that it only moves with the broad market a little more than one-tenth of the time.

That said, any sector on a long, successful run should be viewed with caution. Some analysts wonder whether oil-related stocks have reached the point of being overvalued, and investors should be wary of overexposure in any sector, especially a volatile one.

The fund courts risk by virtue of its concentration, both in portfolio composition (it’s not unusual to have 70% of its assets in the top ten holdings) and within a volatile industry. Investors should carefully consider all these risks when considering IYE as a niche holding.

The Fidelity Independent Adviser ETF Momentum Tracker is published each Wednesday. For more information call (800) 548-3797 or visit www.fidelityadviser.com


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