Just when investors though that smooth sailing was on the
horizon once again for the stock markets, geopolitical risks in
Europe quickly materialized, and pushed equities back lower. The
clash between Russia and Ukraine is now reaching crisis
proportions, with the threat of war marching ever higher in the
American stocks were down about 1% on the news, while European
equities were pushed even lower as a result. German and Italian
markets saw a slump of more than 3%, while Russian securities
crashed (such as the Russia ETF
), as the ruble tumbled and stocks in the nation lost about 10% on
Any Safe Havens?
While this new risk of war in Europe negatively impacted stocks by
and large, the turmoil could actually be good news for some
commodities. Gold in particular was a winner, though domestic oil
and natural gas companies could benefit in the medium term if there
is a prolonged struggle in Eastern Europe (see
all the European Equity ETFs
After all, Russia is a huge supplier of both natural gas and oil,
and Western Europe and other markets are heavily dependent on
Russian production to fuel their economies. But if the crisis
escalates further, Russia could either be hit with sanctions, or
depending on how events play out, could freeze European markets out
of its vast oil and natural gas supplies.
This will force oil higher and it may also push Western Europe to
look to other markets in order to meet their energy needs. Oil
prices are already up more than 2%, and a more energy hungry Europe
could push prices even higher, potentially leading to a greater
demand for both domestic production here in the U.S., or even LNG
exports to our European allies in the medium term.
This is especially true if the crisis in Ukraine forces Western
Europe to close their ranks and consider Russia as an adversary in
the region. If this is the case, it will be vital for the region to
wean itself off of the vast Russian hydrocarbon supplies and to get
their energy from friendlier nations (see
all the Energy ETFs here
All of this bodes well for domestic oil and gas companies which
could remain relatively unscathed by the crisis and may be longer
term beneficiaries from the geopolitical shift. For investors
seeking to make a broad play on oil and gas, an ETF approach could
be the way to go at this time. This technique could help to spread
risks around while still allowing for a broad play on the space.
How to Play
Below, we highlight three such ETFs that could benefit from the
escalating tensions, and the rising energy commodity prices in the
near term, any of which could be an interesting addition given the
Crisis in Eastern Europe:
iShares U.S. Oil & Gas Exploration & Production ETF
This ETF could be a top choice if investors want to focus on
companies engaged in exploration and production activities. And
since it only holds U.S. companies, exposure to Eastern European
events should be limited (though not entirely eliminated thanks to
the presence of some large caps).
The fund follows the Dow Jones US Select Oil Exploration &
Production Index, holding about 75 companies in total.
ConocoPhilips takes the top spot in the ETF, though EOG Resources
and Phillips 66 round out the top three (read
Are Oil Exploration ETFs Ready to Breakout?
IEO has a bit of a focus on the exploration side, though companies
in the broader integrated oil & gas category account for about
30% of assets too. The fund does cost 45 basis points a year in
fees for its exposure, and it currently has a Zacks ETF Rank #1
First Trust ISE-Revere Natural Gas Index Fund (
If you are looking for a concentrated play on natural gas
production and exploration, FCG could be a great choice. This equal
weight fund holds about 30 stocks in this corner of the market, and
it could be an interesting long term play should LNG shipments
eventually rise due to the Russian intervention in the Crimea.
And in the short term, a brutal winter in the U.S. looks likely to
keep prices elevated anyway, acting as a great catalyst even if the
European crisis fizzles out.
Investors should note that the fund looks at four different factors
in order to select companies, focusing on PE, P/B, ROE, and the
correlation to natural gas futures. These ranks are averaged, and
the top 30 stocks based on the final rank are included in the
A Comprehensive Guide to Oil & Gas ETFs
Due to this equal weight focus, large caps account for just under
half of the portfolio, leaving nearly one-third of the fund for
small and micro cap stocks. And once again, the U.S. dominates
here, though there is a small holding in Canada and Norway as well.
PowerShares S&P SmallCap Energy Portfolio (
If you are looking to avoid international holdings entirely in the
energy space, PowerShares' PSCE could be an interesting choice. The
fund has a small cap focus, zeroing in on the S&P SmallCap 600
Capped Energy Index for exposure to about 30 domestic energy names.
Companies in this portfolio run the spectrum of the energy sector,
with equipment (50%) taking the biggest chunk, followed by
exploration/production (37%), and coal/alternative energy (7%)
rounding out the top three. Due to the small cap focus though, the
fund can see very volatile periods, while it isn't the most popular
on the list either.
Still, if you are looking to get in a variety of domestic energy
stories with one ETF, this could be a great option. The space
should continue to run, and if the energy pendulum swings back to
the U.S. even further, these firms may become interesting M&A
targets, or increasingly important to Western production demands.
Tensions are really heating up in the Crimea, as Russian troops
appear poised to take over the region. This threat of war-and the
resulting rage from Western powers-is riling markets across the
globe (also see
Emerging Market ETFs: Any Bright Spots?
While many stocks have been negatively impacted by this news,
commodities have been a winner, with gold and energy commodities
seeing gains. Companies that focus on energy commodities, and
especially in Western-friendly nations, could be the real winners
from this upheaval though, and the aforementioned ETFs that focus
on the space could be the best ways to play the changing tides in
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FT-ISE R NAT GA (FCG): ETF Research Reports
ISHARS-US O&G (IEO): ETF Research Reports
PWRSH-SP SC EGY (PSCE): ETF Research Reports
MKT VEC-RUSSIA (RSX): ETF Research Reports
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