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By Scott Burns | 12-16-2009 01:51 PM

Ride the Natural Gas M&A Wave

Use this ETF to play the expected wave of mergers in the natural gas space following Exxon's purchase of XTO Energy.

Scott Burns: M&A is heating up in the oil and gas patch, and we've got the ETF to capitalize on that. Hi there. I'm Scott Burns, Director of ETF Analysis with Morningstar.

Exxon's announcement recently to purchase XTO Energy at a mind-boggling 25 percent premium has really got people thinking about how the entire natural gas complex in the United States is going to work out, and a certain move by the majors to move into that area. When we look at the oil majors, the Exxons, the Chevrons of the world, we see that they're actually natural gas light, especially when we look at alternative forms of natural gas or non-conventional natural gas, as it's called.

Working with our equity analysts here, they've identified actually eight very likely targets in the oil and gas patch. When we cross-reference that list and dig deep into ETF portfolios, there's one ETF that really jumps out, and that's iShares Dow Jones Oil & Gas Exploration Index. The ticker on that is IEO.

This is a fund that actually we've been big fans of in the Morningstar ETF Research Group. It's actually the third largest holding in our ETFInvestor, hands-on, tactical portfolio. When we look at that fund, it was actually also the third largest holder of XTO Energy. So it was a big day for that fund and for that stock.

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