Oil prices have recovered from historic lows. As energy stocks bounce back, take full advantage with these 3 oil ETFs.
Oil prices have come a long way from negative-$37 a barrel. Ten months removed from West Texas Intermediate crude oil futures going negative for the first time in history last May, oil prices are back above $60 a barrel for the first time since before the pandemic. Meanwhile, energy stocks, in the dumps after months of losses and with no more sellers left, have gotten off their knees and then some. But individual energy stocks can still seem a tad unpredictable. Oil ETFs are a more efficient way to play the nascent 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 at the moment. Here are three that have shown particular strength as oil prices have rebounded.
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 the start of November, the IEO has nearly doubled, up 92% from 25 to 48, and yet still trading well below its October 2018 peak above 77. That combination of momentum plus plenty of 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 roughly 80% of the fund’s total assets. So as crude oil prices have rebounded, so has the XLE; it’s up 67% in the last four months, riding the coattails of the 92 rebound in oil prices.
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. From January 2016 through October 2018, the DBO more than doubled in price. Similarly, since oil futures got up off their knees at the start of November, the DBO has rallied 64%. Having consolidated a bit in the last week, this looks like a good entry point as long as oil futures keep escalating.
Bottom line: As the world claws its way back from the financial ruin Covid-19 has wrought, oil prices are likely to continue rebounding. And that makes energy stocks a good place to be, especially since most of them remain well below their previous highs. 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-rising sector.
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.