The word ‘wild’ doesn’t even start to describe the oil markets over the last few weeks. We saw a price war between Russia and Saudi Arabia after world economies shut down to slow the spread of Covdi-19. Then an agreement between Russia, Saudi Arabia, and the other OPEC+ countries. That was followed by negative prices on futures contracts in the US. Majors changes to how large oil industry ETFs operate and several funds closing altogether. And then oil began to recover as inventory levels weren’t as bad as many expected them to be.
So, your guess is as good as mine in terms of what happens next. However, most would agree that when world economies begin to open back up and operate in some form of ‘new normal,’ we will likely see demand for oil increase, which will probably send the prices higher, if not at least stabilize them. With that sort of thinking, there are a few ETFs you may want to put on your watch list and consider buying when you feel the mayhem, we experienced over the last few weeks is over.
The first is the SPDR S&P Oil & Gas Exploration & Production ETF (XOP). The XOP has 57 holdings with an average weighted market cap of $21 billion. The fund also has a distribution yield of 3.05% and an expense ratio of just 0.35%. XOP has over $2.12 billion in assets under management, making it one of the largest oil and gas-focused ETFs you can buy. Furthermore, the fund offers an equal-weighted approach, so it is not weighed down by just a few big names in the industry. However, give the fund a little more risk during a time like now because if some of the smaller firms struggle, they do matter more to the fund than if the ETF was weighted differently.
That could make the idea of buying an ‘all-inclusive’ Oil ETF not as appealing to some investors. However, with all the uncertainty surrounding the industry, now is probably not the best time to try and ‘cherry-pick’ the winners and losers. There is ‘safety in numbers’ when it comes to investing. However, that is also why you really shouldn’t be buying XOP or any of the other oil ETFs until we know the craziness in the oil markets is truly behind us. The old saying that it’s better to be late to the party than early is undoubtedly one that applies to the oil industry today.
With that thought fresh in your mind, another ETF that may be worth considering is the Direxion Daily S&P Oil & Gas Exploration and Production Bull 2X ETF (GUSH). This is certainly not an ETF you should rush out and buy since it is a leveraged product. But it tracks the S&P Oil and Gas Exploration and Production Select Industry Index, which is what the XOP also tracks and gives you three times the leverage. GUSH has an expense ratio of 1.17% and will cost you a lot if you hold on to it long-term due to its use of derivatives. GUSH should only be used when your confidence level that the oil markets will move higher in the short term is extremely high, and at this time, I don’t know anyone that can confidently say those words.
The last ETF I would like to highlight is the Invesco Dynamic Energy Exploration & Production ETF (PXE). This ETF has a different method for picking its components, which could give investors the upper hand. PXE attempts to pick winners in the industry by following a complex tiered weighting methodology. The fund tends to have a small-cap tilt and somehow is more conservative than the benchmark it tracks. The fund rebalances quarterly and has a reasonable expense ratio, 0.63%. PXE offers a distribution yield of 3.17% and has 31 holdings. The fund has easily outpaced XOP over the last month with a gain of 71% compared to XOP’s return of 38%. However, even with those impressive one-month results, I don’t feel now is yet the time to buy.
All three of the funds mentioned above or any company in the oil and gas industry are very risky today. Investors should wait and see what demand for oil looks like when world economies open back up and where the price of oil is before jumping head-first into this very volatile industry. With so many different moving parts, different countries, different opinions, and different cultures all affecting the price of oil, and the last few weeks to prove, we never know what is going to happen with oil prices. However, during normal times, the price of the commodity is typically more stable, thus making the industry less risky to invest in. Just remember, it’s better to be late than early to the party.
Disclosure: This contributor did not hold a position in any investment mentioned above at the time this blog post was published. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.