The first investment solution to be launched by Octane Investments, a firm founded last year focused on traditional energy stocks, is the Octane All-Cap Value Energy ETF (OCTA), it announced Thursday.
In a release, the firm described OCTA, listed on the Nasdaq with a net expense ratio of 0.30%, as a “high-conviction” actively managed exchange-traded fund.
OCTA focuses on “under the radar” energy stocks with market caps more than $1 billion.
Explaining the strategy behind the new ETF, Octane said it’s “no secret that energy stocks are out of favor with investors these days and have been for some time” due to issues including the “fossil fuel divestment trend, spurred by a now in-retreat ESG movement; investors’ negative experiences during the waning days of the ‘Shale Era’ and COVID; and the yawning valuation gap between large- and small-cap equities spurred by massive allocations to passive investment approaches.”
Those trends “combined to leave a large swath of the energy equity universe dramatically undervalued when compared to their earnings potential,” according to the firm. “Where these trends persist, opportunities exist; but noting opportunity and acting upon it properly are two very different things,” it said.
The approach that the firm says is “underpinning the fund is built on Octane’s proprietary investment ‘decision tree’ which in this case starts with the universe of energy stocks trading on U.S. exchanges (removing companies with a market cap below $1 billion as well as any Emerging Markets and/or tar sands companies).”
The key questions that will be asked as part of the approach to investing in a company are whether it has high free cash flow, a strong balance sheet and a consistent history of returning cash to shareholders, according to Octane.
At the same time, ETFs remain hugely popular investment solutions.
ETF asset growth over the last decade has significantly increased, driven by increased adoption by financial advisors, Cerulli Associates recently said, predicting advisors will only continue increasing their use of ETFs.
“The world needs traditional energy, yet the exposure that most investors have to the category is at historically low levels,” according to David Allen, Managing Director at Octane Investments.
“But the solution is not simply to allocate more to the biggest and broadest energy funds on the market as doing so only means investors will continue to miss out on the potential growth and yield to be found when taking a more robust, systematic approach to allocating to the sector,” he said.
Allen added there are several use cases Octane has identified for OCTA, including as a means to increase energy exposure in a diversified equity portfolio, to balance the large-cap-centric tilt of the most widely used energy ETFs on the market and as a hedge against persistent inflation.
He continued, “Our active value approach is uniquely suited to the specific challenges and opportunities inherent in investing in the energy sector, particularly when viewed through the lens of today’s distorted markets.”
Jeff Berman, Contributing Editor & Reporter at Wealth Solutions Report, can be reached at jberman@wealthsolutionsreport.com.
