These Energy ETFs Could Be Buyable on the Pullback

The energy sector was the best-performing sector in the S&P 500 last year, and through the first six months of 2022, that remained the case and by a significant margin.

Now, with gas prices declining and growth stocks rallying mightily off their July lows, some investors are worried about their energy holdings while others may be thinking they missed the good times altogether. Neither theory may prove accurate. In fact, some analysts remain bullish on oil and there are data points to support that notion.

“U.S. crude exports hit 5 million barrels per day, the highest on record, EIA data showed, as WTI has traded at a steep discount to Brent, making purchases of U.S. crude more attractive to foreign buyers,” reports Reuters. “In a sign of strong demand, gasoline stocks drew 4.6 million barrels, much higher than the expected 1.1 million barrel draw.”

With an energy sector rebound a legitimate possibility, investors may want to consider the following exchange-traded funds.

Alerian MLP ETF (AMLP)

The Alerian MLP ETF (AMLP) is the largest ETF dedicated to master limited partnerships (MLPs), which are the income-generating segment of the energy patch. AMLP lives up to that reputation with an eye-catching dividend yield of 9.30%.

Another benefit of MLPs is that owing to the toll road nature of their business model, the stocks often aren’t as highly correlated to oil prices as are shares of traditional oil producers and the like. AMLP is proving that benefit as it’s down just 7.68% from its 52-week high. As for income, the good news is many midstream energy names are maintain or boosting – not cutting – payouts.

“Midstream companies continued to build on their track record of positive dividend trends with their latest payouts," according to Alerian research. "For the fourth straight quarter, there were no dividend cuts across the Alerian energy infrastructure index suite. The majority of names maintained their payouts sequentially, as increases tend to be biased to 4Q and 1Q payouts, but there were still notable examples of growth concentrated among MLPs."

First Trust Energy AlphaDEX® Fund (FXN)

The First Trust Energy AlphaDEX® Fund (FXN) isn’t a run-of-the-mill cap-weighted energy ETF. Rather, the fund follows the StrataQuant® Energy Index, which employs a variety of growth and value metrics to construct the ETF’s 40 stock lineup.

The result is an ETF that’s dramatically different than cap-weighted rivals as highlighted by the fact that none of its components exceed a weight of 4.85% and the median market value of the holdings is $24.64 billion. Both of those numbers are low relative to traditional rivals in this category. Overall, FXN is a solid energy ETF for investors looking for a buy on the pullback idea.

“While volatility may continue in the near term, we believe selloffs may provide more attractive entry points for investors, particularly those that remain underweight energy stocks,” according to First Trust research. “While we concede that a deep global recession could negatively impact demand for fossil fuels in the near term, we believe longer-term supply-demand dynamics, as well as geopolitical influences, will likely support relatively high prices for oil and natural gas, which may continue to fuel robust earnings for energy companies. Moreover, despite relatively strong performance since the Fall of 2020, energy stock valuations remain historically cheap.”

VanEck Oil Refiners ETF (CRAK)

The VanEck Oil Refiners ETF (CRAK) is the lone ETF dedicated to refining equities, which can do and benefit from various supply and demand dynamics in the oil space. CRAK doesn’t command attention comparable to other energy ETFs, but recent headlines out of second-quarter earnings season confirm fundamentals are stout among CRAK components.

“Valero Energy (NYSE: VLO) one of the largest U.S. independent refiners, said that its net income in the second quarter reached $4.7 billion, nearly 29 times what it was a year earlier and well above Wall Street expectations," reports Jinjoo Lee for the Wall Street Journal. "The quarterly profit, a record high, wasn’t far from the full-year profit record it set in 2006. PBF, a smaller refiner, saw net income of $1.2 billion, 24% higher than the number analysts polled by Visible Alpha had penciled in."

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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