ETFs provide options for investors with varied tactics.
The U.S. is starting to see the onset of inflation in 2018. One way investors can profit from inflationary trends is to get exposure to raw materials that will be rising in price, such as crude oil. Prices for oil have gone from less than $50 a barrel last year to highs of around $70 a barrel in 2018, meaning bigger profits for the companies that pump this fossil fuel out of the ground or bring it to market. For investors who want insulation from inflationary trends or simply like the outlook for energy, here are a seven exchange-traded funds that could give direct exposure to the oil sector.
Energy Select Sector SPDR Fund (ticker: XLE)
The largest energy ETF out there is the XLE, with a massive $17.5 billion in assets under management. This is a great place to start if you’re looking at investing in the energy sector, with the fund holding a piece of the biggest names in the sector, including giants Exxon Mobil Corp. (XOM) and Chevron Corp. (CVX). Note this fund is weighted based on market capitalization, however, and more than 70 percent of assets are allocated in the top 10 positions. That means a small sliver of the sector could be the deciding factor in your performance, instead of a truly broad mix of energy companies.
Guggenheim S&P 500 Equal Weight Energy ETF (RYE)
With just 31 holdings as of this writing, the RYE strives for a roughly 3.2 percent weighting for each position, and rebalances its portfolio quarterly with that aim in mind. In one way, this is a clear advantage to those who want diversification across the energy sector. However, it’s worth noting that such a small list of stocks is not without its risks — particularly since the ETF tends to focus on very similar names in big oil that tend to move as a group. In other words, simply having an equal share in more stocks doesn’t mean you’re truly diversified. It is a sector-focused fund, after all.
Global X China Energy ETF (CHIE)
One way to truly look beyond the conventional holdings of most mainstream energy ETFs is to look outside of the U.S. That’s what the CHIE does, by putting a global twist on the conventional large-cap energy funds that are so common. Top holdings include state-owned oil giant China Petroleum & Chemical Corp. (SNP), better known as Sinopec, and the Hong Kong and China Gas Co. These megacaps are in many ways the Asian equivalent of domestic big oil stocks, and may provide a nice geographic diversification to energy portfolios — particularly given all the talk of a trade war in 2018.
iShares U.S. Oil & Gas Exploration & Production ETF (IEO)
Another way to slice up the energy sector is focus on the explorers — that is, the smaller companies that find new energy fields and pump crude oil and natural gas. The IEO includes companies that are higher risk because they depend on access to new supplies and the dynamics of global fossil fuel prices. These kinds of companies can include ConocoPhillips (COP) and mid-cap names like Andeavor (ANDV). They make up the first link in the energy supply chain, and are the best way to play a resurgence in crude oil prices. Just remember they may be first to take a hit if oil prices roll over.
PowerShares S&P SmallCap Energy Portfolio (PSCE)
Another more aggressive tactic is to go after the smaller players across the energy sector. The PSCE is a PowerShares fund with stocks less than about $3 million in market capitalization, and thus is focused on the less entrenched and more agile players in the space. Holdings that include smaller exploration firms PDC Energy (PDCE) and SRC Energy (SRCI) are certain to be the highest fliers in any uptrend as they can quickly adapt to changing conditions. If you’re OK with a bold bet on energy, there is perhaps no better focused fund on the space than this one.
John Hancock Multi-Factor Energy ETF (JHME)
The previous funds are limited in some way by a specific structure and focus — either size, geography or sub-sector within the broader industry of energy. JHME instead applies a filter based on subjective metrics that include profitability measures like margins or valuation metrics like price-earnings ratio. This is admittedly a boutique fund, with a much smaller base of assets and a flavor of an actively managed fund. But it is an interesting alternative to plain vanilla sector funds in the energy space, and perhaps a safer bet if you believe not all stocks in the oil patch should be sorted simply.
USCF United States Oil Fund (USO)
There’s nothing that says you have to invest in stocks at all to play the energy sector. That’s where the USO comes in, with an exchange-traded offering benchmarked to crude oil itself. Specifically, the fund trades short-term crude oil futures for West Texas Intermediate light, sweet crude oil. There are several different measures for oil prices, but this is one of the most commonly used and referenced on the nightly news. The good news is that you don’t have to worry about reading SEC filings or consider stock valuation metrics. But that may be cold comfort if oil prices decline.
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7 Energy ETFs to Buy for Oil’s Comeback originally appeared on usnews.com
