OIH ETF: Question & Answer

Oil companies have long been in focus for investors as the industry is crucial to the economy, providing fuels for transportation and power, as well as the core ingredients of petrochemicals used to make products that people rely on every day, including plastics, rubber and fertilizers. Given its size, there are many areas of opportunity within the oil industry. However, this blog focuses specifically on oil services and is intended to answer frequently asked questions on VanEck’s Oil Services ETF (OIH).

• What is an oil service company?
• How is the portfolio composition determined for OIH?
• How much impact do oil prices have on oil service companies and OIH?
• What are the benefits and risks associated with an investment in oil service companies?
• Where does OIH fit into a portfolio?
• Does OIH generate Schedule K-1 tax statements?

What is an oil service company?

The oilfield services industry refers to products and services associated, primarily, with the upstream oil and gas exploration and production (E&P) industry. In general, oil service companies are engaged in the manufacturing, repair and maintenance of equipment used in oil extraction and transportation. This includes services such as seismic testing, well construction, directional services for horizontal drillers, as well as transport services. Additionally, many oil service companies also offer technology-based services that are vital for successful field operations, such as energy data management, drilling and formation evaluation, geological sciences, and many others that help drive efficiencies in resource extraction and management.

How is the portfolio composition determined for OIH?

The VanEck Oil Services ETF (OIH) provides exposure to U.S.-listed oil services companies using a passive strategy, meaning that the fund uses an indexing investment approach and attempts to approximate the investment performance of an index by investing in a portfolio of securities that generally replicate that index. This is in contrast to actively managed strategies, which instead employ fund managers who pick stocks and make frequent trades to generate returns.

OIH seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the MVIS^® US Listed Oil Services 25 Index (MVOIHTR), which is intended to track the overall performance of U.S.-listed companies involved in oil services to the upstream oil sector, which include oil equipment, oil services, or oil drilling. The Index is a pure-play, market capitalization weighted index offering targeted exposure to the 25 largest and most liquid U.S.-listed companies in the space.

How much impact do oil prices have on oil service companies and OIH?

The revenue of oil service companies is largely a function of the capital and operating expenditure of oil and gas E&P companies, which is in turn governed by current and future expectations of the price of oil & natural gas. Because of this relationship, oil services, and thus OIH, have historically had a higher correlation and beta to oil prices than other more diversified sub-industries such as integrated companies or downstream segments such as refining. However, while the oil service industry is certainly dependent on oil prices, it is not the only factor. Many other factors are also at play that can influence the industry as well. As such, an investment in the equities of oil service companies should not be expected to perform the same as a direct investment in oil.

What are the benefits and risks associated with an investment in oil service companies?

There are several benefits often associated with an investment in oil servicing companies or natural resources equities in general. One of the primary benefits is inflation protection. Energy-related equities, such as oil services companies, have historically performed well in inflationary economic environments, which has become a growing concern for many investors of late. Another benefit is participation in global growth. Commodities and natural resources equities (including oil services) may allow investors to participate in global growth as demand increases for energy worldwide. Additionally, oil service equities can also help provide much-desired diversification to a portfolio.

Along with the benefits of an investment in oil service companies, it is also important to note that there are associated risks as well. Volatility can be one of those risks. Oil, and commodities in general, can be cyclical in nature and come with higher volatility than the broad market. Oil prices, and the industry as a whole, have been hit hard before in past years and is certainly susceptible to further corrections. Another risk facing the oil industry is continued focus globally on sustainable energy. Although many traditional energy companies have recognized this trend and are working to reduce their environmental impact, this transition to sustainable energy sources may still have long-term impacts on the industry. Additionally, unforeseen risks such as geopolitical risks, OPEC surprises and shale trends in the U.S. may also have an impact moving forward.

Where does OIH fit into a portfolio?

A typical investor should probably consider at least some percentage of an overall portfolio for an allocation to oil services. This may potentially help provide some of the benefits highlighted in the above question such as inflation protection, participation in global growth as well as diversification. Additionally, because of its targeted exposure and liquidity, OIH can also be used tactically by investors to express a short- or long-term view with a highly liquid, low-cost ETF.

Does OIH generate Schedule K-1 tax statements?

No. Unlike an investment in many commodity strategies, the equities of oil service companies, and thus OIH, do not generate burdensome K-1 tax statements.