Oil has been the worst nightmare over the past one year. After terrible trading in the second half of 2014 and into 2015, oil price is finally showing some signs of stability. However, the outlook for oil is still not encouraging given increasing U.S. production, a large supply glut and sluggish demand, indicating bigger drops ahead.

In such a backdrop, though most oil stocks have suffered badly, there is one corner of the sector that has continued to thrive. And it is oil refining. This is because the players in this industry use oil as an input for processing refined petroleum products like gasoline. Hence, lower oil prices are boosting margins for the refiners, leading to healthy stock prices. Encouraged by this trend, Market Vectors is seeking to launch energy ETFs targeting this niche segment (read: 3 Energy ETFs Leading The Oil Rally).

As per the latest filing with the SEC, the ETF arm of Van Eck Global filed for the Market Vectors Oil Refiners ETF (CRAK) that could be a one-stop shop for investors to play the oil refining market. While key information – such as expense ratio and holdings breakdown – was not available in the initial release, other important points were released in the filing.

We have highlighted those below for investors interested in a new energy play from Market Vectors should it clear regulatory hurdles:

Proposed ETF in Focus

CRAK looks to follow the Market Vectors Global Oil Refiners Index. The benchmark measures the performance of the largest and most liquid companies in the global oil refining segment. Companies to be eligible for inclusion in the index should generate at least 50% of their revenues from crude oil refining including gasoline, diesel, jet fuel, fuel oil, naphtha, and other petrochemicals, or have at least half of their assets devoted to the refining of crude oil.

The index currently holds 26 securities with largest allocations to Phillips 66 (PSX- Analyst Report), Valero Energy (VLO - Analyst Report) and Marathon Petroleum (MPC- Analyst Report) that collectively make up for 22.4% share. In terms of country exposure, U.S. takes the top spot at 39.2% while South Korea and japan round off the top three with double-digit allocation each (read: The Complete Guide to Oil and Gas ETF Investing).  

How Does It Fit in a Portfolio?

This new fund, if approved, could be an interesting option for investors seeking a diversified global exposure to the oil refining corner of the broad energy space amid the current oil market turmoil.

Investors should note that the fund index has outperformed the global energy benchmark from a year-to-date look, generating excellent returns of 13.6% versus a loss of 2.5% for the S&P 500 Energy index. This trend is likely to continue if crude prices (input costs) fall further, leading to higher spreads. Spread is the difference in price between a barrel of oil and a barrel of refined product like gasoline, diesel, or jet fuel. It only means that the higher the spread, the more the profits for oil refiners (read: Short Oil ETFs in Focus as Crude Prices Keep Falling).

All these point to sound fundamentals for refining stocks and the strengths will also be reflected in the yet-to-be-launched ETF.  

Competition

While the new product doesn’t have a direct contender providing exposure to this niche market, a number of products tracking the broad energy space could give tough competition to the proposed energy ETF.

Among the most popular are Energy Select Sector SPDR (XLE - ETF report),Vanguard Energy ETF (VDE - ETF report) and iShares U.S. Energy ETF (IYE -ETF report) targeting the American energy market. The trio has an AUM of $13.5 billion, $4.3 billion and $2.1 billion, respectively. In the global space, iShares Global Energy ETF (IXC - ETF report) could make CRAK’s quest for assets quite difficult (see: all the energy ETFs here).

However, Market Vectors has proved its success with two energy ETFs – Market Vectors Oil Services ETF (OIH - ETF report) and Market Vectors Unconventional Oil & Gas ETF (FRAK - ETF report). Both the funds have accumulated $1.1 billion and $70.9 million in its asset base. As such, it will not be difficult for the proposed product to garner sufficient investor interest should it pass regulatory hurdles and generate decent total returns net of fees. Investors as it is are looking for exposure to this under-served corner of the ETF energy space.

Further, the proposed product would definitely get the first mover advantage, as CRAK will be the first oil refining ETF in the energy space.