This Energy ETF Should Get A Tax Reform Boost

The Tax Cuts and Jobs Act of 2017 is expected to benefit multiple sectors. Energy, the seventh-largest sector weight in the S&P 500, paid one of the highest effective tax rates in corporate America prior to the tax reform passage, but the sector's tax rate is poised to dramatically decline.

Among energy sub-industries, refiners in particular are being highlighted by some analysts as big tax reform winners. Should that thesis prove accurate, the VanEck Vectors Oil Refiners ETF CRAK could benefit. CRAK's underlying index gives “a means of tracking the overall performance of companies involved in crude oil refining which may include: gasoline, diesel, jet fuel, fuel oil, naphtha, and other petrochemicals,” according to VanEck. 

While CRAK has been caught up in the recent equity market sell-off, sliding more than 7 percent over the past week, the exchange-traded fund is one of the best-performing energy funds over the past year, surging more than 40 percent over that time.

Enviable Positioning

Tax reform is seen as a boon for the energy sector, but the benefits are unlikely to be evenly distributed across the entire sector.

“U.S. refiners on average are better positioned to take advantage of these benefits than exploration and production (E&P) companies,” said Fitch Ratings. “This is because the refining sector has been in a cash tax paying position over the past several years, driven by above-trend crack spreads, strong economic growth, access to cheaper shale based crudes, and structurally cheap gas and power.”

CRAK holds 26 stocks and its top 10 holdings combine for nearly 60 percent of its weight. Those components include Phillips 66 PSX, Valero Energy Corp. VLO, Marathon Petroleum Corp. MPC and Hollyfrontier Corp. HFC.

Tax Reform Could Help Refiner Dividends

CRAK yields 2.21 percent, which is decent though not spectacular. However, tax reform could benefit the dividend positions of some of the fund's US-based holdings.

“Fitch expects increased tax-related cash flows will partly be used to help support refiner distribution policies,” said the ratings agency. “Marathon Petroleum cited extra cash from tax relief as a factor in its decision to increase its dividend by 15 percent. Valero did not directly link its 14 percent dividend increase to the tax legislation, but did cite the cash tax benefit and noted that it had paid out above its target range for payouts in 2017.”

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