Oil Prices are Back on the Rise, and Energy Stocks are Following Suit. But There’s a More Efficient Way to Play the Rally.
After cratering in the last three months of 2018, crude oil prices are back on the rise, rising to $60 a barrel this week after dipping as low as $42 a barrel in late December. The rebound in oil prices has been welcome news for oil stocks – and oil ETFs.
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.
That’s why oil ETFs are starting to look appealing again after getting pummeled during the recent market correction. Oil is becoming a good momentum play again, and the most efficient way to play it is through an oil ETF.
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There are a number of oil ETFs that have been making strong moves in recent weeks. Here are three that stand out:
Oil ETFs to Buy: 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), Devon Energy (DVN) and EOG Resources (EOG) among its 10 largest holdings (out of 100). IEO is up 8% year to date, rising as high as 62 after bottoming at 47 on Christmas Eve. It stubbed its toe in April and May, falling back to as low as 51 as oil prices pulled back. Now it’s back above its 50-day moving average, and has been trending upward for a month.
Oil ETFs to Buy: United States Oil Fund LP (USO)
USO is the best pure-play fund that tracks crude oil prices; it’s the largest, most liquid of futures-backed oil ETFs, with 26 million shares exchanging hands daily and roughly $1.5 billion in assets. The USO is up more than 30% already this year – riding the coattails of the big rebound in oil prices. In fact, over the past five years USO has had a 0.96 correlation (1.0 is the highest) with crude. That’s a good thing now that oil prices are surging again.
Oil ETFs to Buy: 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. Lately, that strategy has been working: the DBO is up 25% this year. This one tends to move fast when oil prices are on the rise, advancing 60% in the year prior to the collapse in crude began last October.
Bottom line: The rally in energy stocks is still young, and could have plenty of legs as long as oil prices don’t suddenly nosedive the way they did at the end of last year. And the longer energy remains a popular rebound play on Wall Street, the better the chances these three oil ETFs will extend their recent rises.
Investment analyst and Chief Analyst of Cabot Wealth Daily, Chris Preston brings you all the latest from the investing world. Sign up to get updates and breaking news delivered FREE to your inbox. Get unlimited access to our library of complimentary investing reports.Sign up now!
*This post has been updated from the original version, published in 2016.