Oil prices have come a long way from negative-$37 a barrel. Two years removed from West Texas Intermediate crude oil futures going negative for the first time in history in May 2020, oil prices - with a huge push from the Russia-Ukraine crisis - are back above $100 a barrel for the first time since 2014. Meanwhile, energy stocks, in the dumps after months of losses and with no more sellers left, have gotten off their knees and then some, and are one of the few sectors (along with utilities) that have actually posted gains in 2022. But individual energy stocks can still seem a tad unpredictable. Oil ETFs are a more efficient way to play the rebound.
As we so often say here at Cabot Wealth Network, we’re stock pickers. We prefer to recommend individual stocks—growth stocks, value stocks, small-cap stocks, etc. However, there are occasions when we recommend exchange-traded funds (ETFs). One of those occasions is when there’s a red-hot or rebounding sector and you want to take full advantage of its momentum. Rather than pick one or two stocks, it can make sense to buy an ETF that tracks a whole basket of stocks in that sector.
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That’s why oil ETFs are a good option right now. Here are three that have shown particular strength as oil prices have soared.
Oil ETFs: iShares U.S. Oil & Gas Exploration & Production ETF (IEO)
As the name suggests, this ETF holds oil and gas companies specifically focused on exploration and production. It counts ConocoPhillips (COP), Marathon Petroleum (MPC) and EOG Resources (EOG) among its 10 largest holdings (out of 100). Since November 2020 the IEO has quadrupled from 25 to 100, and pushed above its pre-pandemic high of 77. That combination of momentum plus upside makes this look like a very attractive entry point...
Oil ETFs: Energy Select Sector SPDR Fund (XLE)
The XLE is essentially a proxy for energy stocks as a group, with holdings that include all of the biggest names in the sector (Exxon (XOM), Chevron (CVX), Phillips 66 (PSX), Schlumberger (SLB), etc.), the 10 largest of which account for 77% of the fund’s total assets. So as crude oil prices have accelerated, so has the XLE; it’s up 60% in the last year, riding the coattails of the 59% rebound in energy.
Oil ETFs: PowerShares DB Oil Fund (DBO)
This one’s a bit more niche, but it’s based on the value of crude oil futures contracts, which is where the DBO invests 100% of its assets. When oil prices rise, this fund rises even faster. To wit: since oil futures got up off their knees at the start of November 2020, the DBO has nearly tripled. More importantly, it’s up 44% so far this year.
Bottom line: Oil prices are back to 2014 levels, and could keep going higher as the Russia-Ukraine crisis worsens. And that makes energy stocks a good place to be. Investing in any one of these oil ETFs is a nice catch-all way to play the rebound, gaining access to an entire chunk of a fast-recovering sector.
Do you own any energy stocks or ETFs not on this list? Tell us about them in the comments below.
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*This post has been updated from the original version, published in 2016.
