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Profit From Sub-$40 Oil with These ETFs

Zacks Equity Research

It has been a regular practice for oil to break its own record on its way down for the last one and a half years. Although by now the markets are familiarized with persistently low oil prices, blows were too hard yesterday, when the’ black gold’ fell below the psychologically resistant level of $40 for the first time since late August. U.S. crude oil plunged 4.6% on December 2 and is hovering around at a 6–1/2 year low.

The latest move came in the wake of a boom in U.S. oil supplies. U.S. government data indicated crude builds for the 10th successive week. As per Energy Information Administration (EIA), U.S. crude oil inventories increased 1.2 million barrels last week, despite a rise in refining rates.
 
Also, the Organization of the Petroleum Exporting Countries’ (OPEC) decision of no-production cut led to this freefall. In fact, several market experts believe that OPEC will stick to the ‘no-cut’ decision in its Friday meeting to maintain its supremacy in oil production and not let non-members like U.S. and Russia gain a sizable market share.
 
Though OPEC members like Venezuela and Iran support the production cut view to calm down the turbulence in the crude market, OPEC top brass Saudi Arabia and other Gulf countries are more concerned about market share, per CNBC. Forget production cut; in fact OPEC is pumping more oil than the daily quota of 30 million barrels, which is about one-third of global supply. The group came up with production of 32.12 million barrels a day, last month, as per CNBC.
 
On the other hand, the demand scenario is also feeble owing to growth issues in the Euro zone and Japan as well as a slowdown in China. Global demand has grown close to one million barrels a day every year, on average, for quite a few years.
 
Well, after more than a year of wreckage, everybody is now busy in finding out where is the bottom? Several analysts are now expecting the second half of 2016 to be the timeframe when the commodity might stabilize and take an upturn. But as of now, things look as slippery as they were a few months before.

United States Oil Fund (USO) and PowerShares DB Oil Fund (DBO) – that provide exposure to the West Texas Intermediate (WTI) crude – lost over 3.6% and 2.9% respectively on December 2, 2015 (read: Oil ETFs Head to Head: USO vs DBO).
 
How to Play?
 
Investors should note that the today’s investing world always has options to play the slump or surge in any security. Below we highlight three ETF areas that could be beneficial for investors if crude continues to buckle under pressure.

PowerShares DB Crude Oil Short ETN (SZO)
 
The bearish fundamentals give opportunity to investors to make a short play on the commodity.

SZO – an ETN option – provides inverse exposure to WTI crude without any leverage. It tracks the the Deutsche Bank Liquid Commodity Index – Oil – which measures the performance of the basket of oil futures contracts. The note is unpopular as depicted by AUM of $16.5 million and average daily volume of nearly 6,500 shares a day. Expense ratio comes in at 0.75%. SZO was up 2.7% on December 2 and is up 10.5% so far this year.
 
iShares Dow Jones Transportation Average Fund (IYT)
 
Energy cost is the major cost for transportation companies. Airlines, shipment and rail companies all run on energies and thus need oil. As a result, a drop in oil prices can boost the margins of the transportation stocks and the related ETFs. Also, stepped-up activity thanks to a steadily improving U.S. economy favors this ETF.
 
In total, the product holds 20 securities. From a sector perspective, Air Freight & Logistics takes the top spot with about 30% share followed by railroads (22.5%) and airlines (22.1%). The fund has amassed about $1849.2 in AUM while sees a good trading volume of more than 300,000 shares a day. It charges 43 bps in annual fees and has lost about 11.9% so far in the year. Thus, a lower oil price is a much-needed weapon for this ETF (read: 4 Sector ETFs on Sale).

iShares Dow Jones US Consumer Services Sector Index Fund (IYC)
 
Consumer spending is largely related to energy prices. Higher energy bills related to cars and other home appliances normally limit consumer spending and check their discretionary purchases. Thus, with a substantial plunge in oil prices, consumers will be able to spend their heart out on discretionary items, especially in the holiday season – a key selling period.
 
The 187-stock fund has accumulated about $1.06 billion in assets. The fund charges 45 bps in fees. It has a tilt toward retailing (36.25%) and media (25.71%) stocks. So far this year, the fund is up 6.9% and has a Zacks ETF Rank #2 with a Medium risk outlook (read: IYC: A Better Consumer ETF?).

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