Use This Tiny ETF to Play Global Energy Stocks

For various sectors, it is often said that foreign stocks offer higher dividend yields than their U.S. counterparts. That is especially true in the energy patch. For example, the dividend yield on Exxon Mobil (NYSE:XOM), the largest U.S. oil company is just 2.6 percent. Investors can get another 210 basis points of yield with Royal Dutch Shell (NYSE: RDS-A), Europe's largest oil company.

Even embattled BP (NYSE:BP), Europe's second-largest oil company, yields an attractive 5.2 percent. That is double Exxon's yield and well above the 3.4 percent offered by Chevron (NYSE:CVX).

Investors looking to exploit this theme at the ETF level should consider the tiny SPDR S&P Energy Sector ETF (NYSE:IPW), which S&P Capital IQ rated Marketweight in a recent research note. IPW yields 3.3 percent, nearly double the dividend yield on the far larger Select Sector Energy SPDR (NYSE:XLE).

The big stumbling block with IPW is its diminutive stature. The fund has just $11.1 million in assets, which as S&P Capital IQ notes, contributes to a wide bid/ask spread and the firm's tepid overall ranking of the fund.

On the bright side, IPW "owns a number of stocks that our global equity research team views as attractively valued, with many of the companies having investment grade credit ratings from Standard & Poor's Ratings Services," S&P Capital IQ said in the note.

Two Royal Dutch Shell securities combine for 16.5 percent of IPW's weight, making the Anglo-Dutch oil giant the most represented company in the ETF. BP at 9.9 percent is IPW's largest individual holding. France's Total (NYSE:TOT), Italy's Eni (NYSE:E) and Canada's Suncor Energy (NYSE:SU) are also found among the fund's top-10 holdings. Overall, four of IPW's eight largest holdings are rated Buy by S&P Capital IQ.

"S&P Capital IQ's Buy recommendation on Total is supported by its above-average 6% dividend yield and a belief that its conventional upstream portfolio is strong," the firm said in the note. S&P "estimates that the company's four-year upstream unit costs are low compared to its super-major peers and its organic reserve replacement rate will be over 100% in 2012-15. In addition to being an S&P Capital IQ Buy recommended stock, Total has a Standard & Poor's Credit Rating of AA-."

Year-to-date, IPW has lagged the performance of XLE, but the SPDR fund has slightly outperformed the rival iShares MSCI ACWI ex US Energy Sector Index Fund (NYSE:AXEN).

Another point is in IPW's favor is developed markets exposure. The fund offers token exposure to South Korea, but none to Brazil. That means Petrobras (NYSE:PBR), one of the worst-performing major global oil stocks over the past several years, is not part of IPW's lineup.

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