The Strive U.S. Energy exchange-traded fund (DRLL) , a new energy fund on the market, boasts it's "anti-ESG" -- shunning the environmental, social, and governance movement. It appears to resemble SSGA's Energy Select SPDR Fund (XLE) . Let's drill down on this new player with a strong ticker name.
The fund is from new ETF issuer Strive Asset Management (issued through Alpha Architect's white label platform) and started trading on Wednesday. DRLL sports a 41-basis point expense ratio meaning that shareholders with $1,000 invested over a calendar year will pay $4.10 in fees over that period. The fund is a passive product and tracks the Solactive United States Energy Regulated Capped Index. The index methodology guide can be found here.
Active Management Through Activism
The issuer maintains it will "strive to unlock value in the US energy sector by mandating companies to focus on profits over politics." Watching the company's promotional video on their website certainly indicates that it's fired up about the current state of affairs in the U.S. oil & gas industry and are looking for shareholders to join them in their bid to influence company management through proxy voting and direct engagement. Reading through their investment case document, Strive makes points about how the "big three" (Blackrock (BLK) /iShares, Vanguard, and State Street Global Advisors (STT) ) have been affecting change that is ultimately destructive to energy companies' bottom line results.
Strive has set its own mandate to support energy company spending decisions "exclusively based on financially measurable returns on investment, without regard to any other social, political, cultural or environmental goals." The fund manager also takes issue with what is known as "Scope 3 Emissions Reporting," which is the reporting of any downstream environmental impact of the use of a company's product(s).
DRLL vs. XLE
The first question I had about this fund was, "How is it different from XLE?" To answer that question, I pulled down the holdings from both funds and had a look. DRLL has an almost 100% overlap with XLE with the exception of EOG Resources (EOG) and Pioneer Natural Resources Company (PXD) . DRLL, however, has over twice the equity components as XLE with 52 compared to XLE's 21. Also the index DRLL tracks isn't restricted just to oil and gas names but also midstream companies as well as coal, hydroelectric, nuclear, wind, solar, biomass and geothermal focused names. This mix kind of seems to run counter to the DRLL rhetoric, but assumedly if we get to the point where non-carbon-focused energy sources dominate hydrocarbons, then the fund might have to pivot its branding. As long as it delivers strong performance, however, I'm sure shareholders won't mind.
Current holdings are just over 97% focused on oil & gas companies, but there are a handful of renewables names, including AES Corp. (AES) First Solar (FSLR) , Sunrun (RUN) , Nextera Energy Partners (NEP) , Brookfield Renewable Corp (BEPC) and Clearway Energy (CWEN) as well as one nuclear power focused company BWX Technologies (BWXT) .
If the chart below seems a little busy, it's because it is. While I was able to find a chart of the full history of the index that DRLL tracks, I was unable to access the underlying data. What I did to create this chart was to pull down the price history for the Energy Select SPDR Fund (XLE) and set the dates and scale to match a screenshot of the graph of the Solactive U.S. Energy Regulated Capped Index. XLE is the dark blueline and is linked to the left axis and the index is set to the right axis.
Readers should note that part of the reason for the index outperforming the fund has to do with the drag from the fund's expense ratio. It is small (10-basis points) but over time that can add up as you can see. The only real problem came in the form of XLE dipping lower than the index in 2020. You can see that over time the index does seem to outperform XLE. It should be noted that this index went "live" in June of 2022 so results prior to that date are part of a theoretical backtest. The XLE data is all live as the fund launched in 1998.
Looking at index returns since the June 30 live date through the close of Aug. 9, 2022, the index does pick up about 100 basis points over XLE (5.64% vs 4.53) so while there is the drag of the fund expense ratio on the longer-term results shown above that effect is negligible here and shows that the index is indeed doing something different than XLE.
Wrap It Up
Investors have long used or attempted to use, their clout as shareholders to affect change at companies. Often, they are not successful for a simple reason which is, that they don't own enough shares. I'm not saying that issuer Strive can't achieve what it is setting out to do, but it does have a long asset-gathering road ahead. Given that it's backed by venture capitalist Peter Thiel and Pershing Square founder Bill Ackman, the asset gathering piece might not be as onerous as a typical new ETF issuer. The good news from a strategy perspective is that the index it's tracking seems to have some embedded advantages to the industry benchmark XLE and assuming it can get that word out to investors, the fund should be well on its way to achieving not just asset-gathering goals but ideological goals as well. If you feel that the U.S. oil and gas industry is on the cusp of a resurgence and ripe for a 2-times to 3-times move from current levels as Strive does, then perhaps DRLL is worth a closer look.
