Jeremy Poland
Jeremy Poland
The Strive U.S. Energy ETF (NYSE:DRLL) ("DRLL" or the "Fund") is a passively managed exchange traded fund ((ETF)). The Fund seeks broad and concentrated market exposure to the U.S. energy sector (broadly speaking).
Due to a negative near-term view of the energy sector (cynically, I expect the Biden administration will work to ensure oil does not rise materially before the election, while natural gas suffers from abundant supplies), I do not currently own a position in the Fund. I have moved the Fund to my Watchlist, however, due to its low valuation per Morningstar (Portfolio P/E below 12, 4.50% dividend yield, and strong growth in sales, book value and cash flow). In short, I consider the Fund to currently be a Hold, and will consider accumulating on weakness.
Longer-term, I do like the Fund for a few reasons.
First, I appreciate the fact that the Fund management takes its fiduciary obligations seriously.
Second, I want to diversify away from Vanguard, BlackRock, State Street and the other large institutional fund managers that have become too large (monopolies in some respects) and too politically active.
Third, I like the fact that DRLL, unlike other energy fund ETF competitors, does provide exposure to green/renewable energy companies.
I elaborate on the foregoing below, but first some basics about the Fund.
In comparison to competitor firms like BlackRock (BLK) and Vanguard, which have been supportive of Environmental, Social and Governance (ESG) shareholder proposals that treat "stakeholders" on par with shareholders, the Fund and its sponsor, Strive Asset Management, seeks to differentiate itself by only supporting shareholder proposals that reflect the primacy of the shareholder interests. DRLL does this in part by lobbying management teams to seek excellence, merit and profitably.
Basic information concerning the Fund, taken from the Fund's website, is found below.
| Inception Date | 08/09/2022 |
| Primary Exchange | NYSE |
| Ticker | DRLL |
| CUSIP | 02072L722 |
| Expense Ratio | 0.41% |
The Fund's portfolio tracks the Solactive United States Energy Regulated Capped Index (the “Index”), which measures the performance of the energy sector of the U.S. equity market as defined by Solactive AG (the "Index Provider”) and includes large and mid-capitalization companies.
Per the Prospectus for the Fund:
The Index uses a capping methodology to constrain individual securities at quarterly rebalance to ensure: (i) the weights of any single issuer shall not exceed 22.5%, and (ii) the aggregate weight of all issuers that individually exceed 4.5% of the Index shall not have a weight greater than 45% of the Index. The weight of one or more securities in the Index may exceed these limits due to fluctuations in market value of the securities in the Index, corporate actions, or other events that change the Index composition between quarterly rebalance dates. Substantially all of the Index is expected to be represented by securities of companies in the energy industry or sector (typically oil, coal, and natural gas companies, but may also include companies that produce renewable or alternative energy such as hydrogen, nuclear, solar, and wind power).
As of September 30, 2023, approximately 94% of the Index was comprised of fossil fuel companies and approximately 6% of the Index was comprised of renewable energy companies....
The Index is normally reconstituted on a quarterly basis in February, May, August, and November."
[Emphasis Added].
Other key documents concerning the Index composition and construction are included here. To be selected into the Fund:
FIRST, a portfolio company must already be included in the Solactive GBS United States 1000 Index (an index which track the performance of the largest 1,000 companies from the US stock market based on company market capitalization and weighted by free-float market capitalization).
SECOND, a portfolio company must also be assigned one of the following national industries, according to the North America Industry Classification System ((NAICS)):
211120 - Crude Petroleum Extraction.
211130 - Natural Gas Extraction.
212111 - Bituminous Coal and Lignite Surface Mining.
212112 - Bituminous Coal Underground Mining.
212113 - Anthracite Mining.
213111 - Drilling Oil and Gas Wells.
213112 - Support Activities for Oil and Gas Operations.
213113 - Support Activities for Coal Mining.
221111 - Hydroelectric Power Generation.
221113 - Nuclear Electric Power Generation.
221114 - Solar Electric Power Generation.
221115 - Wind Electric Power Generation.
221116 - Geothermal Electric Power Generation.
221117 - Biomass Electric Power Generation.
221210 - Natural Gas Distribution.
237120 - Oil and Gas Pipeline and Related Structures Construction.
324110 - Petroleum Refineries.
324199 - All Other Petroleum and Coal Products Manufacturing.
333132 - Oil and Gas Field Machinery and Equipment Manufacturing.
486110 - Pipeline Transportation of Crude Oil.
486210 - Pipeline Transportation of Natural Gas.
After clearing the first two screens, the selection of the portfolio companies is then market weighted subject to certain Rules, including a rule that no single Portfolio company can be more than 22.5% of the Portfolio.
Italicized NAIC segments above reiterate the point that the universe of available companies for the Portfolio is much broader than the universe available to pure (fossil fuel) energy ETF competitors.
As of February 13, 2024, per Seeking Alpha, data, the top 10 holdings of the Fund are as follows:
1) Exxon Mobil Corp 22.43%.
2) Chevron Corp 14.29%.
3) ConocoPhillips 7.40%.
4) Schlumberger Ltd 3.69%.
5) EOG Resources Inc 3.57%.
6) Phillips 66 3.52%.
7) Marathon Petroleum Corp 3.31%.
8) Pioneer Natural Resources Co 2.91%.
9) Valero Energy Corp 2.58%.
10) Williams Companies Inc 2.28%.
Total: 65.95%.
The Portfolio is dominated by shares of the larger multinational energy companies, as shown above. Holdings one through four make up nearly 50% of the Fund. In addition, the eighth holding, Pioneer Natural Resources (PXD), is being acquired by Exxon Mobil (XOM). Exxon Mobil is near its max weighting, so the merger will not provide XOM with a greater weighting the in the Fund.
While the dominance of multi-national energy provides stability and dividends, such stability probably limits upside in an energy bull market, where investors might get more bang for their investment dollar by investing in non-mega cap companies.
Adobe Stock
While other Seeking Alpha authors have highlighted that the Portfolio of the Fund overlaps with competitors, roughly 89% in the case of the Energy Select SPDR Fund ETF (XLE) and roughly 82% in the case of the Vanguard Energy ETF (VDE), the differences in the respective portfolios could be the driver of the Fund's outperformance going forward. Why? Well, unlike those competitor energy funds, DRLL does have exposure to clean energy companies, in addition to traditional fossil fuel companies like Exxon Mobil (XOM) and Chevron (CVX) (which two holdings notably make up more than 35% of the Fund).
For example, as of September 30, 2023, per the Prospectus linked above (see page 37), approximately 6% of the Portfolio consisted of renewable energy companies, including Brookfield Renewable Corporation (BEPC) ((BRC)) and AES Corporation (AES) ((AES)). Moreover, as the Fund's Index evolves over time and the U.S. uses more renewable energy, it is likely that the Fund's renewable energy holdings will increase and its overlap with competitor ETFs will decline. I do think this aspect of the Portfolio (i.e., that is likely to be more differentiated from its competitors in the future due to its renewable energy exposure) has gone unnoticed.
Keep in mind too that part of the Portfolio's underperformance relative to competitors in the past year has been due to its exposure to those renewable energy companies -- of the two companies mentioned above, AES is down more than 35% in the past year, and BRC is down more than 13% (in each case, as of February 9, 2024 per Seeking Alpha data). Of course, it is possible that renewable energy companies will be perennial underperformers. Nonetheless, this exposure (which will grow if the renewable energy companies grow in market capitalization) is a key differentiator between DRLL and its competitors.
In the Introduction section, it was noted that the Strive portfolio managers are focused on shareholder value (not ESG). In a recent interview, the CEO of Strive Funds summarized the firm's philosophy as follows:
As far as people that stand for shareholder primacy, period, I don’t think there’s actually true competitors to Strive.... Strive’s products right now are competing against BlackRock, State Street, Vanguard, index offerings that are the core equity beta, the core fixed-income beta for most people’s retirement accounts, investment accounts, passively managed products....
But we’re going after the big dogs and I think it really becomes simple: Are you willing to sell your vote, sell your potential returns for a couple of pennies or do you want an asset manager that’s going to push your value into corporate America?
[P]eople’s investment accounts, their retirement accounts, they should be working for them, not against them. And I think it’s actually the opposite today. And I don’t think it has to be that way for that much longer because one of the things that we’ve noticed in a lot of our conversations with corporate America is that most corporations actually agree with us and have been pushed, pushed by these large asset managers, pushed by climate activists...."
And from the Strive website:
We aim to increase long-run capital market realized returns and assumptions by restoring free market capitalism by leading companies to focus on excellence. When the time comes for you to purchase Strive products and solutions for yourself, your clients, or the institution you represent, you can do so with the confidence that our sole obligation is to the financial interests of our clients and that we will always prioritize the shareholder over other stakeholders."
At the end of the day, investors can use Vanguard, State Street or BlackRock and obtain a similar portfolio to the Fund, and they can do so at a lower cost. There is no denying that. However, as those behemoth fund managers pursue stakeholder/ESG capitalism in lieu of shareholder focused capitalism, there is a long-term risk that fossil fuel industry returns will decline.
As alluded to above, governmental policies and ESG policies/activism could adversely affect the fossil fuel industry, which would, in turn, cause the Fund's portfolio to decline. Energy markets are inherently volatile and subject to periods of boom and bust. Energy markets are also subject to cartel dynamics (see OPEC). Energy supplies are often found located in unstable countries. Energy business are capital intensive and heavily reliant on capital markets to raise capital; consequently, interest rate risks and liquidity risks abound in the energy space. Other risks are outlined in the Prospectus linked above. To date, the Fund has performed well in terms of gathering assets under management, which currently stand at more than $300 million.
If the Fund continues to underperform competitors (the Fund was down nearly 2% in 2023 while competitors were up roughly 1.5% per Morningstar, putting the Fund in the bottom quartile), however, there is a risk that assets will leave the Fund for less expensive, better performing, competitor ETFs, of which there are currently plenty.
In conclusion, unlike its competitors, 1) the Fund has expressed a commitment to shareholder capitalism versus stakeholder capitalism, and 2) the Fund has exposure to renewable energy companies, in addition to fossil fuel energy companies. Such exposure could support Fund outperformance going forward, particularly after the recent underperformance of the renewable energy space. For now, however, given my near term negative view of the energy space, the Fund remains a Hold on my Watchlist.