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 sheer growth numbers have industry punters licking their chops.
From just a handful of offerings a couple of decades ago, we're now bombarded with a cornucopia of everything ETF: nearly 150 providers in the United States now offer more than 2,000 ETFs to investors backed by an impressive $5 trillion in assets under management (AUM).
But passive investing is rapidly becoming a global phenomenon.
According to independent ETF research firm ETFGI, assets invested in the global ETFs and ETPs (exchange-traded products) space clocked in at $8.56 trillion by the end of the first quarter, meaning the ETF industry is now bigger than the mutual fund industry.
Yet, as Deborah Fuhr, founder of ETFGI, has told CNBC's ETF Edge, these are simply the early innings, with the burgeoning industry set to scale to even higher heights thanks to the SEC recently creating a more level playing field after watering down its arduous exemptive relief rule.
Mainstream energy funds have been recording strong inflows this year thanks to a strong rebound in oil and gas prices, while reverse and clean energy ETFs have performed poorly.
Here are the best and worst-performing energy ETFs.
Direxion Daily S&P Oil & Gas Exp. & Prod. Bull 2x Shares ETF(GUSH)
Expense Ratio: 1.14%
YTD Returns: 81.1%
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).
United States Oil ETF, LP (USO)
YTD Returns: 45.9%
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.
USO gained notoriety last year after becoming the focus of the worst oil price crash in history.
Last year, 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.
SPDR S&P Oil & Gas Exploration & Production ETF(XOP)
Expense Ratio: 0.35%
YTD Returns: 42.6%
If you are not content settling for a vanilla fund that targets obvious energy candidates such as ExxonMobil (NYSE:XOM) and Chevron (NYSE:CVX), SPDR S&P Oil & Gas Exploration & Production ETF (NYSEARCA:XOP) offers a good way to dip your toes into something different. XOP currently invests in 57 energy exploration and production companies. The fund is pretty well diversified: The top holding in the fund, Antero Resources Corp. (NYSE:AR) has a weighting ?3% of the entire portfolio.
That said, diversification is not always what it's cracked up to be: XOP is highly exposed to smaller energy companies, which can lead to high volatility and poor returns when the energy markets sputter.
Vanguard Energy ETF (VDE)
Expense Ratio: 0.10%
YTD Returns: 33.5%
Vanguard funds are popular for undercutting the competition on costs; the Vanguard Energy ETF (NYSEARCA:VDE) has remained true to this ethos by offering the lowest pricing in the sector. With 95 stocks—albeit with less AUM—VDE is a little bit better diversified than XLE, though XOM and CVX still play outsized roles with weightings of 21.95% and 16.56%, 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 US energy companies.
Energy Select Sector SPDR ETF (XLE)
Expense Ratio: 0.12%
YTD Returns: 30.1%
With $22.34B in assets under management, 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 0.12%.
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. One shortcoming though is that the ETF holds just 25 stocks in its portfolio, with ExxonMobil (NYSE:XOM) and Chevron Corp.(NYSE:CVX) over-represented, accounting for nearly 45% of the entire portfolio value.
Direxion Daily S&P Oil & Gas Exp. & Prod. Bear 2x Shares ETF (DRIP)
Expense Ratio: 1.06%
YTD Returns: -67.4%
The Direxion Daily Energy Bear 2x Shares (NYSEARCA:ERY) seeks daily investment results, before fees and expenses, of 200% of the inverse (or opposite), of the performance of the Energy Select Sector Index (XLE). Industry bellwethers Exxon Mobil Corporation and Chevron Corporation account for about 30% of the tracked benchmark, making the fund suitable for those who want a leveraged bet against those names.
ERY features tight bid/ask spreads and daily turnover of 265,000 shares, making it a traders' favorite among the segment. ERY outperformed during last year's energy bear market but has, predictably, been a disaster in the ongoing bull market. The provider, Direxion Investments, warns that the ETF seeks daily goals and should not be expected to track the underlying index over periods longer than one day.
ProShares UltraShort Bloomberg Crude Oil ETF (SCO)
Expense Ratio: 0.95%
YTD Returns: -61.4%
The ProShares UltraShort Bloomberg Crude Oil (SCO) aims to deliver 2X the inverse daily performance of the Bloomberg WTI Crude Oil Subindex. To achieve its objective, this 14-year-old fund invests its assets in futures and options contracts for light sweet crude oil, making it a handy instrument for oil bears who want a straightforward bet against the commodity
SCO offers a narrow 0.08% spread coupled with an average daily volume of roughly $30 million.
iShares S&P Global Clean Energy Index ETF (ICLN)
Expense Ratio: 0.42%
YTD Returns: -18.1%
The iShares Global Clean Energy ETF (NYSEARCA:ICLN) is an exchange-traded fund launched and managed by BlackRock, Inc. The fund invests in stocks of companies operating across clean energy sectors, including growth and value stocks of companies across diversified market capitalization. ICLN seeks to track the performance of the S&P Global Clean Energy Index, by using a representative sampling technique.
After a bumper year in 2020, clean energy funds have lagged in the current year mainly due to valuation concerns. Despite being down 18% this year, ICLN still boasts a 37.5% gain over the past 12 months and 151% over the past five years.
By Charles Kennedy for Oilprice.com
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