Over the last few years, the energy sector’s weight in the S&P 500 has more than doubled. Despite growing enthusiasm for renewable energy.
Consider the following hard-to-ignore facts. On September 27, Exxon Mobil (XOM) reached an all-time high. The United States Oil Fund (USO) is up 14.39% in the last month, while the S&P 500 Energy Index is up 4.50%. More and more people are predicting that Brent crude oil prices will soon reach $100 per barrel. In other words, if investors haven’t already, it’s time to start paying attention to energy shares and related exchange traded funds.
Furthermore, macroeconomic variables such as persistently rising inflation and the prospect of higher interest rates for a longer period of time are encouraging increases in the energy industry. Energy is one of the most favorably connected sectors with 10-year Treasury yields.
“Commodities related sectors, such as Oil & Gas industries and Metals & Mining are most sensitive to oil prices and the USD, since the two variables directly impact commodity prices,” states State Street. “These sectors are also positively correlated to inflation expectations, as higher commodity prices tend to lift inflation expectations and increase the sectors’ profits.”
In other words, the starting points may be aligning for greater upside for the sector, implying that any of the following ETFs may be worth investigating.
EINC stands for VanEck Energy Income ETF.
The VanEck Energy Income ETF (EINC) concentrates on midstream energy companies, which aren’t as closely linked to growing oil prices as their downstream and upstream counterparts, but that doesn’t mean EINC isn’t a viable play on rising oil prices. It is supported by the fact that the ETF is only 2.42% below its 52-week high.
EINC, as the name suggests, is an energy ETF with income potential, as evidenced by a 3.85% dividend yield. At the present, this is arguably safer than other fixed income assets. Furthermore, EINC has some exposure to the oil demand theme.
“Global oil demand reached 103 million barrels per day in June, a new all-time high.” However, the recent crude price recovery has been aided by significant production cuts from OPEC, particularly Saudi Arabia,” said Martijn Rats, Morgan Stanley’s Global Commodity Strategist. “In April, Saudi Arabia continued to export 7.4 million barrels of crude oil per day.” By August, this had dropped to just 5.4 million barrels per day, an exceptionally significant decline in such a short period of time. On a market of 100 million barrels per day, that may not appear to be much, but it is enough to force the market into deficits, cause stocks to fall, and prices to climb.”
PSCE (Invesco S&P SmallCap Energy ETF)
The Invesco S&P SmallCap Energy ETF (PSCE) demonstrates unequivocally that there is always a correct and wrong method to invest. PSCE, which tracks the S&P SmallCap 600 Capped Energy Index, is up 17.3% year to date, compared to the S&P SmallCap 600 Index’s 0.3% gain.
The $262.8 million PSCE debuted in April 2010 and currently holds 30 stocks with a $2.5 billion average market value. The holdings of this energy exchange traded fund “are principally engaged in the business of producing, distributing or servicing energy related products, including oil and gas exploration and production, refining, oil services and pipelines,” According to Invesco,
Almost 34% of PSCE’s components are value companies, which is a potentially encouraging characteristic given the low valuations seen across the small-cap category.
ETF SPDR S&P Oil & Gas Exploration & Production (XOP)
The SPDR S&P Oil & Gas Exploration & Production ETF (XOP) has gained 19.17% in the last 90 days, demonstrating its association to rising oil prices.
The close relationship between exploration and production equities and oil prices forces XOP member firms to tighten supply, which is a problem in the oil market right now. Even if domestic output continues to rise, as it is, it may not be enough to meet all demand. Furthermore, E&P companies’ balance sheets are becoming increasingly clean.
“Potentially higher oil prices may support the industry’s profitability and strong balance sheets even further.” “The industry already has decade-low financial leverage and a record-high return on equity — two high-quality attributes,” according to State Street.
Please note that this article does not offer any instructions or suggestions regarding investment decisions. It is important for you to conduct your own research or seek professional advice from a qualified professional before conducting an investment decision.