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Reasons to Stick With Energy ETFs


U.S. energy stocks and exchange traded funds are getting plenty of attention and deservedly so. Off its early February lows, the Energy Select Sector SPDR (XLE) has surged 14.5%.

And in recent days, a fair percentage (sometimes half or more) of the ETFs making new all-time highs have been energy ETFs, including XLE and a broad swath of competitors. [A Gem of an Energy ETF]

International energy funds have kept pace with their U.S.-focused rivals. The iShares Global Energy ETF (IXC) is higher by nearly 15% since Feb. 3 while the SPDR S&P International Energy Sector ETF (IPW) is up 15.7% over the same period.

The exposure to Shell and Total, the latter of which has been driving the France ETF higher this year, offered by IXC and IPW is important because those stocks have outperformed Dow components Exxon Mobil (XOM) and Chevron (CVX), the two largest U.S. oil companies. [Global Energy ETFs Beating Domestic Rivals]

Although energy stocks and ETFs have been in rally mode, there are reasons to consider sticking with the sector.

“In addition, S&P 500 Energy is pushing to new all-time highs with confirmation from the sector advance-decline line. The relative set-up for Energy is similar to that of October 2010, when the sector moved above its 13, 26, and 40-week relative moving averages and outperformed until April 2011,” said Bank of America Merrill Lynch’s technician Stephen Suttmeier.

Oil ETFs are rallying despite increased U.S. production. By some estimates, U.S. output this year will top the record set in 1972. In the fourth quarter of 2013, Texas alone accounted for 10% of global output.

That has been good news for ETFs with leverage to the North American shale boom such as the SPDR S&P Oil & Gas Exploration & Production ETF (XOP) and the First Trust ISE-Revere Natural Gas Index Fund (FCG) . XOP has been a frequent visitor to the new all-time high club in recent days while FCG is the top-performing non-leveraged sector ETF over the past month. [Natural Gas Finally a Winner]

Still, declining ex-U.S. production could be a catalyst for ETFs such as IXC and IPW.

“Beyond the events in Russia and Ukraine, oil prices are elevated partly due to falling production throughout much of the Middle-East and Africa. For several years now, production has been falling in Libya, Nigeria and South Sudan, mostly due to terrorism and political instability,” said BlackRock Chief Investment Strategist Russ Koesterich in a recent note.

Production in OPEC member Libya, home to Africa’s largest reserves, has plunged to 250,000 barrels per day from 1.7 million before a spate of civil unrest hit the country, according to Koesterich.

The average dividend yield on IXC and IPW is 2.7% compared to just 1.88% on the iShares MSCI ACWI ETF (ACWI) .

iShares Global Energy ETF