Segment Wealth Management

About the Author Segment Wealth Management

Gil Baumgarten, president of Segment Wealth Management, is a 30-year veteran of the securities and investment industry. After beginning his career at the venerable EF Hutton in the early 1980s, Gil became a top producer for UBS and Citigroup Smith Barney. Gil is a two-time recipient of the “Winners Circle” list of top 1000 advisors in America, given to the best financial advisors in the United States, and Gil has also been ranked by Barron’s as one of the 35 best advisors in Texas. Gil is a frequent guest commentator on Bloomberg Radio and hosted his own radio talk show called Dollars and Sense. Gil is also a perennial recipient of the Texas Monthly Magazine Five-Star Advisor award, which is based on an independent study of client satisfaction. Having participated as one of six beta testers in a national UBS program on all-ETF portfolios, Gil is one of only a handful of professional money managers with a 10-year ETF track record. Gil also is an award-winning woodworker, specializing in a particular art form called segmentation, from which the firm’s name is derived. Segmentation is the assembly of various species of wood, cut to fit in a precise pattern. This precision extends to Gil’s investment strategies, where risk components and financial strategies are added and subtracted from client accounts with the same attention to detail.

Preparing For The Rebound In Energy Stocks


Last month, I wrote about how low oil prices are likely to benefit the U.S. economy by acting as a tax cut. That’s great for most consumers, but what if you’re an investor in the energy sector?

The price of West Texas Intermediate crude has fallen more than 50 percent since last summer, and despite an uptick in the past few days, there are signs it may keep falling. Subsequently, oil companies are cutting production, laying off workers and re-evaluating their capital spending as their stock prices fall.

For investors, though, declining oil prices offer the same opportunity as falling stock prices: a chance to buy low.

In the short-term, there’s a lot of disagreement about what oil prices will do and how long they will remain low. The economies of Asia, a key energy consumer, are slowing and Europe is on the verge of deflation. Despite the cutbacks by oil companies, U.S. production is expected to increase at least for the first half of this year, adding to pressure on prices.

But the long-term story for oil and natural gas remains unchanged. Hydraulic fracturing has opened up new reserves, but oil and gas remain finite resources. Global demand for energy is not going to wane over the next decade. China and India alone are working to lift billions of their citizens out of poverty and they need energy to do it. Much of that will come from oil and gas.

In other words, if you’re willing to ride out some volatility over the next couple of years, there are lots of good investments in the energy sector.

For example, you might decide that the outlook for exploration and production is too risky for your investment needs, but the “midstream” business – pipelines, storage and gathering systems – offers more stability. After all, pipeline operators are basically toll collectors. They care less about the price of oil than they do how much of it is moving through their networks.

Many pipeline companies are also master-limited partnerships, which offer certain tax benefits to investors. MLPs were popular as the U.S. energy industry boomed, but they remain some of the best buying opportunities in the energy sector.

Refiners also offer a way to play off the oil price decline. They have to buy crude oil to process into gasoline and other fuels, so lower oil prices actually help their profit margins. In recent years, several integrated oil companies have spun off their refining businesses, offering investors a broader choice of pure refinery plays.

For investors who don’t have the time or the inclination to analyze individual stocks, energy-focused exchange-traded funds offer exposure to the energy space while shielding them from some of the volatility that comes with fluctuating oil prices. With ETFs, you can target a specific sector of the energy industry, such as oilfield services or exploration and production.

The midstream business, for example, has an ETF, the Alerian MLP (NYSEARCA:AMLP), that contains names like Enterprise Pipeline Partners (NYSE:EPD) and Energy Transfer Partners (NYSE:ETP). The energy sector ETF is represented by the Energy Select Sector SPDR (NYSEARCA:XLE), which contains 45 stocks. Remember that the fund is capitalization weighted, so the biggest companies get the biggest allocation in the fund. Accordingly, Exxon (NYSE:XOM) and Chevron (NYSE:CVX) alone comprise almost a third of the fund’s assets. The fund charges just 0.15% annually for keeping the fund together and accounted for. If you like the racier service sector, you can buy an ETF for that too. Schlumberger (NYSE:SLB) and Halliburton (NYSE:HAL) would be typical holdings in either the PowerShares Dynamic Oil & Gas Services ETF (NYSEARCA:PXJ) or the Market Vectors Oil Services ETF (NYSEARCA:OIH).

ETFs don’t often change their holdings by buying or selling stocks. That usually results in lower costs and lower taxes than other types of funds. ETFs are also structurally different than a typical open-ended fund like you might see from Fidelity or Putnam.

When buyers and sellers of ETFs don’t match up in the open market for shares, underlying securities are added or redeemed from the fund. But unlike an open-ended fund, the underlying share activity takes place in the open market, rather than within the walls of the fund. This means that ETFs are unlikely to generate a year-end capital gain distribution. This provides better deferral of taxable profits and adds compounded return to shareholders.

Because of their concentrated risk, ETFs offer investors the chance to get the most out of the energy rebound. Be aware, though, that in the short-term, they also can intensify any additional decline in oil prices. Given the long-term outlook for global oil demand, it’s a risk that for many investors may be worth taking.