October has not been kind to crude oil and the related ETFs. The United States Oil Fund (NYSEARCA:USO), widely considered the benchmark crude oil ETF, is lower by more than 9% since October 1.
Even with that decline, oil is one of this year’s best-performing commodities. Year-to-date, USO is up more than 17%. USO and other oil ETFs are delivering impressive performances even as U.S. crude production soars to record levels.
“Iranian and Venezuelan oil production levels, along with the pace of U.S. shale growth, will drive oil prices in the medium term,” Fitch Ratings says. “Supply constraints at a time of steadily growing demand are leading the Brent price to spike above USD80/bbl.”
Over the near term, buying oil ETFs will likely require patience and forward with crude careening toward its worst monthly performance in over two years. For adventurous investors, here are some oil ETFs to consider right now.
Alerian Energy Infrastructure ETF (ENFR)
Expense ratio: 0.65% per year, or $65 on a $10,000 investment.
Investors looking for a somewhat conservative, buy-the-dip oil ETF may want to consider the Alerian Energy Infrastructure ETF (NYSEARCA:ENFR).
ENFR’s underlying index, the Alerian Energy Infrastructure Index, features companies from four categories: US energy infrastructure MLPs (25%), US general partners (25%), US energy infrastructure companies (25%), and Canadian energy infrastructure companies (25%), according to ALPS.
While ENFR is not a pure oil ETF, it has tracked oil lower in October, sliding more than 9%. However, the fund offers a decent income proposition with a dividend yield of 2.70% and is in position to rally if oil and natural gas prices do the same.
SPDR S&P Oil & Gas Exploration & Production ETF (XOP)
Expense ratio: 0.35% per year, or $35 on a $10,000 investment.
Exploration and production stocks are usually sensitive to oil’s price action, a scenario that often cuts both ways. When crude prices are rallying, oil ETFs, such as the SPDR S&P Oil & Gas Exploration & Production ETF (NYSEARCA:XOP), soar. When crude sinks, oil ETFs like XOP often follow suit. That has been the case in October as this oil ETF entered a new bear market by sliding more than 20%.
XOP “seeks to provide exposure the oil and gas exploration and production segment of the S&P TMI, which comprises the following sub-industries: Integrated Oil & Gas, Oil & Gas Exploration & Production, and Oil & Gas Refining & Marketing,” according to State Street SPDR.
XOP’s relative strength index (RSI) indicates this oil ETF is oversold, but securities can remain oversold for a while. This oil ETF resides about 12% below its 200-day moving average, so investors considering the fund now may want to hold off until bullish signals emerge.
SPDR S&P Oil & Gas Equipment & Services ETF (XES)
Expense ratio: 0.35% per year, or $35 on a $10,000 investment.
The SPDR S&P Oil & Gas Equipment & Services ETF (NYSEARCA:XES) is another example of an oil that is highly sensitive to oil’s price gyrations. XES is also another oil ETF that was slammed in October, sliding more than 20% as of Oct. 30. In the near-term, this oil ETF could be boosted or punished by the results of the upcoming midterm elections.
“A Republican sweep would continue to benefit traditional energy producers, with less regulation and additional lands open for leasing, including areas in the outer continental shelf,” said State Street Global Advisors (SSgA) in a recent note.
Like XOP, XES is an equal-weight ETF. XES’s 41 holdings have a weighted average market value of $5.97 billion, indicating some strength for small- and mid-cap stocks will be required for this oil ETF to rebound from a lousy October.
Invesco DB Oil Fund (DBO)
Expense ratio: 0.78% per year, or $78 on a $10,000 investment.
The other oil ETFs mentioned to this point are equity-based funds, but the Invesco DB Oil Fund (NYSEARCA:DBO) is a futures-based strategy.
This oil ETF “is designed for investors who want a cost-effective and convenient way to invest in commodity futures. The Index is a rules-based index composed of futures contracts on light sweet crude oil (WTI). You cannot invest directly in the Index,” according to Invesco.
As a futures-based oil ETF, DBO’s price action is often driven by supply and demand data. Professional traders have recently been paring bullish bets on oil due in large part to murky demand outlook, but that could change if the U.S. and China resolve their trade spat, setting the stage for more oil exports to China.
VanEck Vectors Oil Refiners ETF (CRAK)
Expense ratio: 0.59% per year, or $59 on a $10,000 investment.
Prior to the start of October, the VanEck Vectors Oil Refiners ETF (NYSEARCA:CRAK) was one of this year’s best-performing oil ETFs. A 14% October decline erased CRAK’s year-to-date gains.
This oil ETF tracks the MVIS Global Oil Refiners Index, “which is a rules-based, modified capitalization weighted index intended to give investors a means of tracking the overall performance of companies involved in crude oil refining which may include: gasoline, diesel, jet fuel, fuel oil, naphtha, and other petrochemicals,” according to VanEck.
There are some fundamental factors supportive of a potential rebound for CRAK.
“Thanks to strength in distillate margins and wide crude spreads, refiners’ total margin has remained attractive, encouraging high utilization rates; combined with capacity increases, this has resulted in record levels of production,” according to Morningstar.
iShares MSCI Global Energy Producers ETF (FILL)
Expense ratio: 0.39% per year, or $39 on a $10,000 investment.
Often overlooked among oil ETFs, the iShares MSCI Global Energy Producers ETF (NYSEARCA:FILL) has been surprisingly steady this year, losing less than 2%. This oil ETF, which is more than six years old, holds over 200 stocks and targets the MSCI ACWI Select Energy Producers Investable Market Index.
FILL features exposure to over a dozen countries, but U.S. energy producers dominate this oil ETF at nearly 47% of the fund’s weight. Dow components Exxon Mobil Corp. (NYSE:XOM) and Chevron Corp. (NYSE:CVX) combine for 22.60% of FILL’s roster.
This oil ETF’s three-year standard deviation of 16.38% compares well with the category average as does its trailing 12-month dividend yield of 2.69%.
Invesco S&P SmallCap Energy ETF (PSCE)
Expense ratio: 0.29% per year, or $29 on a $10,000 investment.
The Invesco S&P SmallCap Energy ETF (NASDAQ:PSCE) is a prime example of an oil ETF that has been drubbed on multiple fronts. Retrenchment in small-cap stocks coupled with declining oil prices sent PSCE lower by more than 21% in October, putting this oil ETF in the precarious position of taking out its 52-week low.
For this oil ETF to rebound in earnest, a confluence of factors need to be met. Those include the obvious rebound in oil prices, investors revisiting small caps and some strength in value stocks because over three-quarters of PSCE’s 35 holdings are considered value names.
Over the past 90 days, investors have pulled $12 million from PSCE, indicating this oil ETF is positioned as a near-term contrarian play.
Todd Shriber does not own any of the aforementioned securities.
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