Oil prices are seeing a bounce.
The energy sector has been under pressure for the better part of two years now. However, in late 2017 we’ve seen some glimmers of hope as crude oil prices have recovered about 20 percent from short-lived lows around $40 this summer. But the big questions right now aren’t about where oil has been, but where it’s headed — and how investors can profit from the trend if it continues. If you’re looking to invest in energy, these seven exchange-traded funds should certainly be on your list of potential investments.
Vanguard Energy ETF (ticker: VDE)
Vanguard is known for its low-fee index funds, and the VDE is a great example of that. Investors can make a play on the sector at large for a rock-bottom expense ratio of just 0.10 percent, or $1 for every $1,000 you invest. But the downside is that the Vanguard Energy ETF isn’t very tactical. Its top holdings are big names like Exxon Mobil Corp. (XOM) and Chevron Corp. (CVX), and these “integrated energy” stocks make up more than 40 percent of the entire portfolio. If you’re looking to play the more established, large-capitalization energy companies as a straightforward bid on the sector, there aren’t many simpler or cheaper ways to do it.
SPDR Oil & Gas Exploration ETF (XOP)
So what if you’re looking for a more aggressive and direct play on energy, where rising oil prices will lift the companies that actually take reserves of crude out of the ground? If that’s your strategy, than the XOP is for you. Top holdings include small-cap exploration companies like Oasis Petroleum (OAS) and Carrizo Oil & Gas (CRZO). There are obvious risks when you stray toward these smaller companies. But since it covers the first link in the chain of crude oil production and consumption, this ETF could be the first to pop if oil marches higher.
iShares Oil Service ETF (IEZ)
Another twist on energy investment is focus on the service side. After all, tiny energy exploration companies can’t do everything on their own and mega-caps like Exxon and Chevron still contract out many services to stay lean and efficient. The IEZ covers the biggest service names in the business, including Schlumberger Limited (SLB), Halliburton Co. (HAL) and Baker Hughes (BHGE). These will be the first companies to get new contracts if we see increased spending and production by oil and gas companies, both large and small. The downside is that if oil prices stay soft or head lower, cutting back service contracts will be the first move many energy companies make.
Alerian MLP ETF (ALMP)
Focused on master limited partnerships, the ALMP is a unique way to deliver tremendous income and a bit of insulation from volatile oil and gas prices. MLPs are unique forms of energy companies that get favorable tax and regulatory treatments since they are “pass through” entities. That means they must generate more than 90 percent of their net income from transportation, processing and storage of oil and gas, rather than taking it out of the ground or selling it directly to end users. Their cash flows are much more reliable and support a roughly 8 percent dividend yield as a result.
Guggenheim Equal Weight Energy ETF (RYE)
Can’t decide which way to play the energy sector? Then let the RYE take the guesswork out of the equation. As the name implies, this fund doesn’t bias toward a single company over another and instead attempts to hold an equal position in every energy name within the Standard & Poor’s 500 index. It rebalances regularly to keep that makeup, too. By simple virtue of there being more small energy production plays instead of $100 billion integrated energy behemoths like Exxon, on the whole there is a bent toward exploration in the portfolio.
United States Oil Fund (USO)
Of course, if you really want to make a bet that oil prices will firm up, then why not just invest directly in oil — or, as directly as you can via an ETF instead of trading actual commodities? That’s where USO comes in. This ETF tracks the daily pricing of West Texas Intermediate crude oil by way of investing in futures contracts on commodity markets. That means there’s no fundamental analysis, no risk of a big earnings miss or ugly corporate public relations disasters to worry about. If you want your investment to be more closely tied to oil without the quirks and complexities of investing in stocks, this is your ticket.
United States Short Oil Fund (DNO)
All this is well and good if you want to take a flier on crude oil coming back in a big way. But what if you’re more interested in the other side of the trade, either as a way to play the downside of oil or simply as a hedge to protect yourself? If that’s your angle, look no further than the DNO — a fund that is effectively the inverse of the previously mentioned USO fund. DNO takes short positions in futures contracts as a way to profit should oil prices decline. It’s a strategy that is more appropriate for hedge funds than an IRA, so it’s certainly not for everyone.
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7 Great Ways to Buy Energy Stocks originally appeared on usnews.com
