Oil prices have recovered from their 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. Just two months removed from West Texas Intermediate crude oil futures going negative for the first time in history (the May contract), oil prices are back above $40 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. But individual energy stocks 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). Right now, the IEO is the dog’s dinner – down 41% year to date. However, when oil prices were on the rise from 2016-2018, it rose 79%. And the fund has already risen 72% from its March 18 low, though it’s down considerably from its June highs around 43. Trading just above 31-32 support, this could be a prime entry point in IEO, especially if oil prices continue to tick upward.
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. As big oil stocks go, so goes the XLE. After staging a big rally in April and May, nearly doubling from the March 23 bottom to its June 8 top, the ETF has sagged back below its 50-day moving average, near its 35-36 support level.
If it can make a move back above its 50-day line (currently in the high 38s), the XLE could be buyable.
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. It’s down 32% year to date, but has been showing steadier momentum than the other two funds on this list, hitting new post-pandemic highs on Tuesday. Because it tracks futures contracts, DBO’s bottom didn’t come until late April, when May futures went negative. It’s up 40% since then, zooming above its 50-day moving average. It looks buyable right here.
Bottom line: The worst of the energy sell-off is likely over. While oil prices could potentially sink again, negative-$37 a barrel oil futures seem unlikely to happen again. Though none of the three oil ETFs I just mentioned have dug themselves out of the massive holes they were in to start the year, they have rebounded nicely from their March and April lows. If oil prices keep going up, so should these ETFs.
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.