Energy ETFs: Careful What You Wish For In November (XLE, XOP)

There's no denying the fact that the Obama Administration has been less than hospitable to U.S.-based integrated and independent oil producers. Whether it has been losing bets on solar energy firms, the ill-fated moratorium on deepwater drilling following the Gulf of Mexico oil spill in 2010 or comments to Brazilian politicians that the U.S. wants to become a larger buyer of Brazilian crude, this probably isn't the president you want to see win another term if you work for a big oil company. Along those lines there is the common election year theory that it's better for stocks such as Exxon Mobil XOM or an ETF such as the Energy Select Sector SPDR XLE to have a Republican in the White House. The reasoning here isn't flawed. In fact, the newly minted Market Vectors Unconventional Oil & Gas ETF FRAK has garnered some praise as a potential winner should Mitt Romney merely secure the GOP nomination. The thesis being that Romney has talked tough about increasing domestic energy production. Again, this isn't particularly flawed thinking. As its ticker indicates, the Market Vectors Unconventional Oil & Gas ETF is heavily allocated to companies that focus on onshore exploration. Occidental Petroleum OXY, the fourth-largest U.S. oil company, is FRAK's top holding with a weight of 7.91%. California-based Occidental engages in NO offshore exploration. The problems for ETFs such as FRAK and XLE exist in the form of turning rhetoric into reality. No, there is no getting around the fact starting from early January 2005, just a couple of weeks before President George W. Bush was inaugurated for his second term, through the end of 2007 that XLE more than doubled. The SPDR S&P Oil & Gas Exploration & Production ETF XOP, the SPDR S&P Oil & Gas Equipment & Services ETF XES and the iShares Dow Jones US Oil Equipment Index Fund IEZ all came onto the scene in 2006 and enjoyed solid returns through the end of 2007. Not surprising as the broader market was running higher and the Bush Administration was, of course, pro oil industry. But as it pertains to increased domestic production, betting on the likes of FRAK, XLE and XOP even if Romney somehow wins the general election could be the epitome of a "buy the rhetoric, sell the result" event. Remember, the Republicans controlled the White House and both houses of Congresses for a couple of years and still could not open ANWR to drilling. The fact that Romney's energy policy is different from President Obama's is no surprise, nor is it surprising that candidate Romney took an Ohio newspaper last month to highlight his energy plans. Not only is Ohio critical to any candidate's plans to win the presidency, the state is also home to the Utica Shale. What may come as a surprise to some is that while the Obama Administration, with all due respect, has its head in the sand regarding domestic energy production, this has not been all that damaging to oil ETFs. The aforementioned SPDR S&P Oil & Gas Equipment & Services ETF has more than doubled since Obama was inaugurated as that ETF's rival, the iShares Dow Jones US Oil Equipment Index Fund. XLE is up nearly 50% since President Obama took office while XOP has surged almost 88%. The First Trust ISE-Revere Natural Gas Index Fund FCG has jumped 42% while the iShares S&P Global Energy Index Fund IXC is the laggard of this particular group with a gain of "just" 36% since Obama became president. Some of IXC's lag may have more to do with BP BP being among its top holdings than any other factors. Talk is cheap, especially political talk. Just as there are no guarantees that a GOP win in November will mean anything more than a short-term pop for energy stocks and ETFs, a second Obama term doesn't necessarily mean bad things at all for the market's treatment of energy fare.