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| ETF
Spotlight -- Oil Service HOLDR (OIH) |
Published: February 2, 2004
The Oil Service HOLDR (OIH, $67.75) is an
exchange-traded fund ETF) that holds a basket of companies involved in
the oil drilling and service industry. As such, they are most profitable
when oil prices and the economy are strong. Because the industry tends
to be capital intensive and is characterized by extremely high costs
(oil rigs, deep sea drilling, exploration), many of OIH's component
stocks have relatively high debt loads. Therefore, high interest rates
tend to put a damper on this fund. Meanwhile, a weak U.S. dollar is
often a boon to these companies. Since oil is priced in dollars, a weak
dollar increases the price of oil in dollar terms, thus improving
company profits.
A quick note about HOLDRS...
HOLDRS, which are managed by brokerage giant Merrill Lynch, are a bit
different from traditional ETFs in the way they trade and in their
expense ratios. For example, you cannot buy or sell less than 100 shares
of a HOLDR in any transaction. Instead, these unique instruments can
only be traded in 100-share round lots. In addition, unlike most other
types of funds, which track broad-based indices that contain hundreds
(or some cases even thousands) of stocks, most HOLDRS consist of just a
handful of stocks and are designed to track a particular industry group.
Because they only track a few companies, HOLDRS are very inexpensive to
manage. However, because they aren't highly diversified, they also tend
to be much more volatile than the average ETF.
Many of the larger oil service firms are heavily
involved in gas exploration as well. Therefore, many of OIH's components
are integrated energy companies. Because of this factor, and because
many different forms of energy can act as replacement products, OIH
shows a strong 86% correlation to the Energy SPDR (XLE, $28.17). The
fund provides an excellent means of diversification for a broader stock
market portfolio, as its correlation to the S&P 500 sits at just
54%. Meanwhile, that correlation is well under 50% when you stack OIH up
against the technology-laden Nasdaq indices.
As noted above, because HOLDRs are less diversified than most other
ETFs, the Oil Service HOLDR tends to be more volatile than one would
otherwise expect. OIH consists only 20 companies, and the top 10
holdings account for nearly 79% of the fund's value. Although no single
stock dominates the fund, three individual companies each account for at
least 9% of the fund's value. They are Baker Hughes (BHI, $35.08,
10.97%), Schlumberger (SLB, $61.18, 9.91%) and Halliburton (HAL, $30.15,
9.63%).
| Oil
Service HOLDR (OIH) |
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| Type: |
Sector |
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| Similar funds: |
Energy
SPDR (XLE) |
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| Options?: |
Yes,
mostly illiquid |
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| Performance
Data |
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| 52-week High: |
$69.81 |
1/27/2004 |
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Annualized
return since: |
| 52-week Low: |
$52.76 |
3/12/2003 |
|
One-year |
26.48% |
| 2003 Return: |
8.90% |
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Three-year |
N/A |
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Five-year |
N/A |
| Dividends: |
$0.41 |
past 12-mos |
Life of fund* |
-10.29% |
| Expense Ratio: |
$0.08
per share per year |
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*
- Started trading 2/7/2001 |
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| Correlation
Data* |
(1/02/02-12/31/03) |
Holdings* |
(as of
1/28/2004) |
| Dow
Jones Industrials |
53.4% |
|
Baker
Hughes (BHI) |
10.97% |
| S&P 500 |
|
54.6% |
|
Schlumberger
(SLB) |
9.91% |
| Nasdaq
Composite |
45.7% |
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Halliburton (HAL) |
9.63% |
| Nasdaq-100 |
|
44.4% |
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BJ
Services (BJS) |
8.21% |
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GlobalSantaFe
(GSF) |
8.14% |
| XLE |
|
86.3% |
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Nabors
Industries (NBR) |
7.84% |
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Transocean
Inc. (RIG) |
7.14% |
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Noble
Corp. (NE) |
5.94% |
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Smith
Intl. (SII) |
5.60% |
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Weatherford
Intl. (WFT) |
5.39% |
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*
Percent top ten are of total |
78.77% |
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| Average
Daily Volume |
|
Average
Daily Price Range |
| Dec-03 |
1,337,655 |
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Dec-03 |
2.0% |
| 2003 |
1,377,073 |
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2003 |
2.5% |
| 2002 |
1,369,898 |
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2002 |
3.8% |
| *
- Correlation measures how closely the two items track each
other |
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*
Includes prior day's close (true range) |
HOW TO MAKE MONEY IN OIH
THIS YEAR
In terms of Elliott Wave analysis, the fund's wave count to its recent
high is a slight concern. There is not a clear five-wave subdivision in
what I would otherwise call a third-wave rally. OIH clearly broke out of
a basing pattern in December, which is bullish. At a minimum, however,
the fund should correct towards channel support, which currently sits
near $66.00.
There is reason for some concern beyond the slightly
sloppy pattern from November's lows:
- The dollar appears to be changing trend. This will
hurt oil service firms.
- Momentum was not confirmed at the high.
- The weekly chart (not shown) shows that OIH is
still in a larger range trade, with substantial resistance in the
$70 to $76 range.
Until OIH can break above $76, there remains risk for
a fall back into the lower or middle $50s.
While many analysts consider energy-oriented stocks a good defensive
play, in the past OIH has been prone to major pullbacks when market
conditions have turned sour. For example, during the most recent bear
market the fund fell more than 50% from its issue price in early 2001,
dropping from a high of $95 to its low later that year beneath $42.
Although I doubt OIH will fall that low again, blindly buying this HOLDR
for defensive measures could be hazardous.
For now, I recommend standing down from any holdings in OIH. Because
other more overbought sectors will provide better shorting
opportunities, I do not suggest shorting OIH either. If the dollar does
not accelerate lower in the next month or two, then an attempt to
purchase an underweight position in OIH near $64 -- just above the 38.2%
retracement of the November-January rally -- with tight stops (say
$61.20, the 2004 low) might make sense. Other than that, I'd steer clear
of this fund for the time being.
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