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Alex Kimani

Alex Kimani

Alex Kimani is a veteran finance writer, investor, engineer and researcher for Safehaven.com. 

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The Best ETFs To Play Energy Markets Right Now

  • An ETF explosion has taken over the financial market as exchange-traded funds enjoy the lion’s share of investment dollars globally.
  • Investors see oil and gas ETFs as a great way to hedge their portfolios against inflation and hedge fund risks.
  • Several oil and gas related ETFs pay investors a healthy dividend.

While analysts are busy expounding on the impact on oil prices of America’s November 8 elections, China’s zero-COVID policy going forward, inflation and production and inventory numbers, exchange-traded funds (ETFs) are a great way to play high commodity prices amid a global energy crisis and a conflict in Europe.  Most, but not all, ETFs are passive, and passive investing has been tapped to continue outperforming its more active brethren amid the current period of heightened uncertainty.

An ETF explosion has taken over the financial market as exchange-traded funds enjoy the lion’s share of investment dollars globally--even as investors continue flocking to passive funds and shunning actively-managed mutual funds.

The following funds could help you hedge against inflation and geopolitical uncertainty.

Energy Select Sector SPDR ETF 

AUM: $42.8B

Expense Ratio: 0.11%

Dividend Yield (FWD): 3.45%

YTD Returns: 54.7% 

With more than $40 billion in assets under management (AUM), the Energy Select Sector SPDR ETF (NYSEARCA:XLE) is the largest dedicated energy fund. It’s also the most liquid and among the cheapest, with an expense ratio of just 0.11%.

XLE tracks the price and yield performance of companies in the Energy Select Sector Index. The index offers investors broad exposure to companies in the oil, gas and energy equipment industries. 

Related: Kazakhstan Prepares To Boost Oil Exports

Another key attraction: the ETF has a respectable 3.45% dividend yield (FWD).

One of its shortcomings though is that the ETF holds just 26 stocks in its portfolio, with ExxonMobil (NYSE: XOM) and Chevron Corp.(NYSE: CVX) over-represented, accounting for more than 40% of the entire portfolio value.

Vanguard Energy ETF 

AUM: $11.0B

Expense Ratio: 0.10%

Dividend Yield (FWD): 3.23%

YTD Returns: 54.9%  

Vanguard funds are traditionally known for undercutting the competition on costs, and the Vanguard Energy ETF (NYSEARCA: VDE) has remained true to this ethos by offering the lowest pricing in the sector. 

With 110 stocks--albeit with significantly less AUM than XLE-- VDE is much better diversified than XLE, though XOM and CVX still play outsized roles with weightings of 22.4% and 16.2%, respectively.

VDE tracks the performance of the MSCI US Investable Market Index (IMI)/Energy 25/50, an index consisting of stocks of large- and mid-cap U.S. energy companies. 

United States Oil ETF, LP

AUM: $2.1B

Expense Ratio: 0.83%

Dividend Yield (FWD): N/A

YTD Returns: 30.7%        

The United States Oil ETF, LP  (NYSEARCA: USO) seeks to track the daily changes in percentage terms of the spot price of light, sweet crude oil delivered to Cushing, Oklahoma. USO invests primarily in futures contracts for light, sweet crude oil, other types of crude oil, diesel-heating oil, gasoline, natural gas, and other petroleum-based fuels. 

Back in April 2020, USO gained notoriety after becoming the focus of the worst oil price crash in history. WTI futures contract sunk an agonizing 310% to minus $38.45/barrel marking the first time that a futures contract for U.S. crude prices went negative--and made all those seemingly improbable ‘negative oil’ prognostications suddenly appear prescient. 

Negative oil prices is an absurd notion that essentially means that producers would pay traders to take the oil off their hands. USO, the country’s largest long-only crude oil exchange-traded fund (ETF) was to blame for the debacle as it owned 25% of the outstanding volume of May WTI oil futures contracts.

Thankfully, a repeat of that kind of mayhem is unlikely after USO moved 20% of the WTI contracts it holds into later months in a bid to lower volatility. And there’s no chance of negative oil right now. 


Direxion Daily S&P Oil & Gas Exp. & Prod. Bull 2x Shares ETF 

AUM: $800.6M

Expense Ratio: 0.95%

Dividend Yield (FWD): 0.39%

YTD Returns: 84.3%

The Direxion Daily S&P Oil & Gas Exp. & Prod. Bull 2x Shares (NYSEARCA: GUSH) is an exchange traded fund that was launched by Direxion Investments in May 2015.

GUSH invests in public equity markets of the United States. The fund uses derivatives such as futures and swaps to create its portfolio and invests in growth and value stocks of companies across diversified market capitalization. It seeks to track 2x the daily performance of the S&P Oil & Gas Exploration & Production Select Industry Index (SPSIOP). Being a leveraged fund, GUSH is prone to wild daily swings especially when oil prices are volatile.

Inverse ETFs

Inverse and inverse-leveraged ETFs create an inverse short position or a leveraged inverse short position in the underlying index through the use of swaps, options, future contracts and other financial instruments. Thanks to their compounding effect, investors are able to enjoy higher returns over short periods of time provided the trend prevails.

Short sellers have now resorted to trading inverse ETFs that bet against the S&P 500 such as ProShares UltraPro Short S&P500 (SPXU), UltraPro Short Russell2000 (SRTY), Daily Dow Jones Internet Bear 3X Shares( WEBS), ProShares UltraPro Short QQQ (SQQQ), and ProShares UltraPro Short Dow30 (SDOW). All these inverse ETFs are in the green, with WEBS having really outperformed with a 201.7% YTD return.

By Alex Kimani for Oilprice.com

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