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Tsvetana Paraskova

Tsvetana Paraskova

Tsvetana is a writer for Oilprice.com with over a decade of experience writing for news outlets such as iNVEZZ and SeeNews. 

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The No.1 Reason Why Investors Are Shunning Energy Stocks

The uncertainty about the U.S.-China trade tension and the future of global oil demand for the rest of the year have resulted in many investors staying away from energy exchange traded funds (EFTs) in recent months, ETF analysts told CNBC in an interview.  

Those investors willing to pour money into energy ETFs would need “somewhat of a steel stomach to step back into this marketplace,” Matthew Bartolini, managing director and head of SPDR Americas Research at State Street Global Advisors, told CNBC on Wednesday.

According to the expert, the whole energy sector is weak right now and the earnings reports of many oil and gas companies for the first quarter didn’t shine, and only a handful of firms beat expectations.

Volatile crude prices and weak refining margins led to lower earnings at all five oil supermajors in the first quarter of 2019, suggesting that Big Oil shouldn’t stay complacent several quarters after the industry emerged from one of the worst downturns in a generation.

Bartolini said that drilling companies may be a better bet than oilfield services companies, even though drillers are more exposed to the spot price of oil, so a fund like SPDR S&P Oil & Gas Exploration & Production ETF (XOP) could have a “negative skew.”

“But, again, if we get a reprieve from these trade tensions, that higher sensitivity could be a benefit to those investors willing to take on that higher volatility,” Bartolini told CNBC.

The SPDR S&P Oil & Gas Exploration & Production ETF has dropped 14.6 percent in the past month and 10 percent in the last three months, although year to date it’s up 0.93 percent. Over the past year, the fund’s performance is a 34-percent decline.

According to CFRA’s senior director of ETF and mutual fund research, Todd Rosenbluth, the midstream Global X MLP & Energy Infrastructure ETF could be a good bet right now, as well as funds featuring large-cap companies like Exxon and Chevron with stable income and strong fundamentals such as Energy Select Sector SPDR Fund and Vanguard Energy Index Fund ETF Shares.

By Tsvetana Paraskova for Oilprice.com

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