These Energy ETFs Are Looking Energetic
Somewhat quietly, the energy sector’s weight in the S&P 500 has more than doubled over the past several years. That despite escalating enthusiasm for renewable energy.
Consider the other hard-to-ignore factoids. Exxon Mobil (XOM) hit an all-time on Sept. 27. The United States Oil Fund (USO) is up 14.39% over the past month the S&P 500 Energy Index is higher by 4.50% over the same span. Recently, more calls are emerging for Brent crude oil prices to soon hit $100 per barrel. In other words, the time is now for investors to start paying attention to energy equities and the related exchange traded funds, if they haven’t been doing that.
Additionally, macroeconomic factors, including stubbornly high inflation and the specter of higher for longer interest rates are supporting gains for the energy sector. Energy is one of the sector’s most positively correlated to 10-year Treasury yields.
“Commodities related sectors, such as Oil & Gas industries and Metals & Mining are most sensitive to oil prices and the USD, since the two variables directly impact commodity prices,” notes State Street. “These sectors are also positively correlated to inflation expectations, as higher commodity prices tend to lift inflation expectations and increase the sectors’ profits.”
In other words, the starts could be aligning for more upside for the sector, indicating that some of the following ETFs could be worth examining.
VanEck Energy Income ETF (EINC)
The VanEck Energy Income ETF (EINC) focuses on midstream energy companies, which historically aren’t as intimately correlated to rising oil prices as are their downstream and upstream counterparts, but that shouldn’t imply that EINC isn’t a credible play on resurgent oil prices. It is as confirmed by the point that the ETF resides just 2.42% below its 52-week high.
As its name implies, EINC is an energy ETF with income properties – a trait confirmed by a dividend yield of 3.85% That’s arguably safer than some fixed income assets at the moment. Plus, EINC has some leverage to the oil demand theme.
“In June, global oil demand reached 103 million barrels a day, a new all time high. But on top of that, the recent crude price rally has been supported by strong production cuts from OPEC, particularly Saudi Arabia,” noted Martijn Rats, Morgan Stanley’s Global Commodity Strategist. “In April, Saudi Arabia still exported 7.4 million barrels per day of crude oil. By August, this had fallen to just 5.4 million barrels a day, that is an unusually sharp drop in a very short space time. On a 100 million barrel per day market, that may not look like much, but this is enough to drive the market into deficits, cause inventories to decline and prices to rise.”
Invesco S&P SmallCap Energy ETF (PSCE)
The Invesco S&P SmallCap Energy ETF (PSCE) is proof positive that there’s always a right and wrong way in investing. PSCE, which follows the S&P SmallCap 600 Capped Energy Index, is up 17.3% year-to-date compared to a meager 0.3% gain for the S&P SmallCap 600 Index.
The $262.8 million PSCE debuted in April 2010 and holds 30 stocks with an average market value of $2.5 billion. This energy ETF’s holdings “are principally engaged in the business of producing, distributing or servicing energy related products, including oil and gas exploration and production, refining, oil services and pipelines,” according to Invesco.
Nearly 34% of PSCE’s components are classified as value stocks – a potentially promising trait when considering the depressed valuations seen throughout the small-cap space.
SPDR S&P Oil & Gas Exploration & Production ETF (XOP)
The SPDR S&P Oil & Gas Exploration & Production ETF (XOP) is proving its correlations to rising oil prices with a 19.17% gain over the past 90 days.
The intimate ties of exploration and production equities to oil prices lever XOP member firms to tighter supply, which is an issue confounding the oil market at the moment. Even if domestic output trends higher, which it is, it might not be enough to meet all demand. Plus, E&P firms are sporting increasingly tidy balance sheets.
“Potential higher oil prices may further support the industry’s profitability and strong balance sheets. Already the industry has decade-low financial leverage and record-high return on equity — two high quality attributes,” notes State Street.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.