PXI ETF: A 2 Factor Fund: Energy & Momentum

Stock Market


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Thesis

The Invesco DWA Energy Momentum (NASDAQ: PXI) is an ETF with a construction based on the Dorsey Wright Energy Technical Leaders Index. The ETF is designed to invest at least 90% of its total assets in the securities that comprise the index. The Dorsey Wright Energy Technical Leaders Index is devised to identify companies that are showing relative strength in the energy sector. Relative strength is the measurement of a security’s performance in a given universe over time as compared to the performance of all other securities in that universe. Both the fund and the index are not static, but rebalanced and reconstituted quarterly based on the latest relative companies performance and ranking.

PXI is up over + 80% in the past year, and over 45% year-to-date. Due to the Covid sell-off the fund displays a very high 3-year standard deviation of 54.98 and a Sharpe ratio of 0.41. The fund is best utilized as a tool to gain energy exposure in a dynamic fashion that identifies momentum names in space. PXI has outperformed both XLE and XOP on a year-to-date basis given its dynamic rebalancing momentum build. Energy has proven to be a cyclical industry in the past, hence PXI might not be a suitable investment for a pure buy-and-hold investors (ie 5 years + time horizon) but represents a great tool to take advantage of a tight commodities market in a dynamic momentum driven re-balanced fashion. As a retail investor if you think higher oil prices are here to stay and you would like to take advantage of this move in a dynamic fashion by identifying names that have technical momentum behind them then PXI is a great tool to consider.

Holdings

The current top fund holdings are:

holdings

Top Holdings (Fund Fact Sheet)

As described above the fund names are re-balanced quarterly based on relative strength, hence the top holdings change every quarter based on the underlying companies’ performance and metrics. The current top holding, Cheniere Energy (LNG), has experienced a vertical stock price action based on the LNG terminals ownership and the recent natural gas deal signed with Europe.

When looking at the underlying holdings and parsing them out on a sectoral basis we get an overweight E&P companies exposure:

sector

Sector Allocation (Fund Fact Sheet)

This fund is exclusively focused on US based companies, hence the basis for geopolitical issues is completely removed as a risk factor here:

geography

Geographic allocation (Fund Fact Sheet)

We have seen how European oil companies like BP (BP) and Shell (RDS.A) (RDS.B) have experienced significant book write-downs and loss of revenue on the back of the Ukraine / Russia crisis and subsequent exit from the jurisdiction . An investor would not get such geopolitical exposure via this fund. The Ukraine / Russia crisis has brought to fore the inherent issues associated with major Oil & Gas companies which have holdings and projects throughout jurisdictions and continents, and have their revenue stream very much subject to local developments in addition to the first factor constituted by oil prices . We believe investors have now woken up to the fact that large Oil & Gas companies, as well as emerging markets Oil & Gas majors have more inherent risk factors embedded in their business models than previously thought. In respect to the Shell Russia write-down for example – how would an investor mathematically price the occurrence of such an event? The correct answer here is a much higher discount rate, but at the same time the universe of investors who assigned any probability of such an occurrence was extremely low to begin with. We believe that going forward US based and US focused energy companies are going to receive a valuation premium due to the legal and political framework where they operate which provides for a very robust and straight forward way of pricing and valuing their future cash flows.

Performance

The fund is up over 45% on a year-to-date basis, outperforming both XLE and XOP:

return

YTD Return (Seeking Alpha)

On a 1-year basis the outperformance is even more pronounced, again due to the dynamic nature of the underlying portfolio that factors in momentum as an additional layer to the underlying energy sector exposure:

return

1-Year Return (Seeking Alpha)

A buy-and-hold investor should nevertheless be mindful of the fact that energy is a cyclical industry, and it experienced a very severe drawdown during the Covid pandemic, being down more than 75% at the time:

years

3-Year Performance (Seeking Alpha)

Conclusion

PXI is an ETF from the momentum suite that caters to energy related companies. The fund has shown a tremendously robust performance in the past year and on a year-to-date basis as oil prices have skyrocketed. What sets this instrument apart is its dynamic portfolio rebalancing which takes into account momentum and relative strength. As a retail investor if you think higher oil prices are here to stay and you would like to take advantage of this move in a dynamic fashion by identifying names that have technical momentum behind them then PXI is a great tool to consider.



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