Invest in Refiners or Oil Refinery ETF?

Investors looking to add Oil Refinery ETF presents a paradox to the modern day proliferation specialised exchange traded products. ETFs can be cost effective and easy way for investors to take advantage of sectors that is expected to outperform the market. It allows investors to gain traction to sectors that would not be cost effective to invest directly (for example emerging market bonds) or improve diversification through international stock exposure.

There are number of major listed oil refinery companies. Most major oil and gas ETFs include a combination of production and distribution as well as services and equipment energy companies. Refinery stocks are also included in the major energy ETFs but does not provide a meaningful option for investors looking to take advantage of changes in the crack spread.

PowerShares Energy Exploration & Production Portfolio (PXE) is one option for investors looking to invest directly in an oil refinery ETF. 35% of the ETF asset is invested in the Oil and Gas Refining and Marketing Sector. Out of all the oil and gas ETF listed, PXE have the highest weighting to oil refinery stocks.

Still 2 reasons investors should think twice before selecting PXE as a proxy for an Oil Refinery ETF:

1. PXE High Liquidity Costs

The overall size PXE has under management is what would be considered to be small. Total market value of the ETF is below $100 million.

Investors would face high liquidity cost buying and selling PXE due to low daily volume. This is irrespective of the fact that the average market capitalization of the holdings are large capitalization stocks (average size of the company – $12 billion. Total 30 companies are included in PXE).

2. Insufficient Sector Weighting

Although there are no other oil and gas ETF that has higher weighting to the oil refinery sector. This does not mean investors have to settle with just PXE. If you are reviewing options for oil refinery sector. Investors should choose the option that gives either direct exposure or none.

Using PXE as partial proxy for an Oil Refinery ETF would introduce additional unintended risks to the investment portfolio. In this case, if investors did not want the remaining 65% of the ETF exposure to Exploration and Production, Utilites or Integrated Oil then that risk have to be managed.

Considering the risk of the ETF creates for the investor. PXE does not seem to be a viable option for investors looking for an Oil Refinery ETF.

Refinery

Invest Directly in Oil Refinery Stocks

The only viable option for investors is direct investment in a basket of refinery stocks. In a sense, investors can create a sub portfolio of diversified oil refiners. For example, if investors are looking to allocate 2% of the portfolio to the Oil Refinery sector. Breaking that 2% down to say an equal weight of 0.25% would result in 8 Oil and Refinery stocks.

Given total portfolio allocation to refinery stocks is 2% spread across 8 large refinery names equally. It can provide direct exposure to the oil refinery sector, sufficient diversification benefits for investors and avoid high liquidity cost of investing in PXE.

See below for the selection of Oil Refinery stocks to be included in the portfolio. Sometimes the old and tested way of creating a specific minor direct investment portfolio is still the best option.

Oil Refinery Company Stocks

Ticker Name
CVRR CVR Refining LP
HFC HollyFrontier Corp
PSX Phillips 66
VLO Valero Energy Cor…
ALDW Alon USA Partners LP
NTI Northern Tier Ene…
ALJ Alon USA Energy, …
DK Delek US Holdings…
TSO Tesoro Corporation
MPC Marathon Petroleu…
HFC HollyFrontier Corp
CLMT Calumet Specialty Products Partners, L.P