Within any market rally or downturn, asset classes tend to perform differently. That’s true even on a day when essentially all stocks and sectors get crushed; some hold up better than others.
Those are the sectors, industries, and stocks you want to be focusing on when building a watch list.
That is also true when world events, whether a pandemic, presidential election in the U.S., or a war in Ukraine, send markets into either a tailspin or a rocket ride. With war in Ukraine raging, today I have three momentum ETFs that are actually benefitting from that unfortunate conflict.
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Over the past year, the S&P energy sector has been the clear leader, with a 12-month return of 33.45%. The sector is down along with the broader market recently, but when it comes to the current crop of outperforming ETFs, energy funds are leading the way.
There’s a good reason for that at the moment: Oil-related ETFs gained momentum last week on news of Russia’s invasion of Ukraine. Crude oil futures surged above $100 per barrel for the first time in eight years, on worries that the military actions may disrupt global oil supplies.
Not to put too fine a point on one session’s action: Clearly, as worries continue about oil supplies, there’s room for this and other oil funds to run, particularly on the heels of last year’s unexpected rally.
2 Energy ETFs with Momentum
The energy sector defied predictions in 2021. Many analysts had expected lingering effects of the pandemic along with political pressures to shift from fossil fuels to more renewable energy, to result in lower oil and gas prices.
Of course, the opposite happened, as prices soared last year, boosting the entire sector.
Among oil ETFs rallying in recent days:
- The United States Oil Fund (USO). This ETF tracks West Texas Intermediate crude futures. It’s up 24% year to date.
- The United States Brent Oil Fund (BNO). This fund tracks Brent crude oil futures. It’s up 30% already this year, with trading volume spiking in recent days.
It’s not out of the question to expect volatility in the energy indexes in the coming days and weeks, as the situation in Ukraine plays out. For example, sanctions against the Russian financial system may cause disruption in the supply of commodities, or result in retaliatory actions from Vladimir Putin.
But in a sense, this uncertainty is nothing new, and is precisely what drives market gains.
After all, if some psychic were able to deliver consistently accurate predictions about the market direction, the entire risk-and-reward equation would be nullified.
So the current geopolitical uncertainty is just the latest development to make its mark on risk assets.
While there are times when essentially all equity asset classes move in tandem (think 2008 or early 2020), there are other times when investors target some categories with selling.
As you might imagine, Russia-focused ETFs have taken it on the chin in the last week.
For example, the VanEck Russia ETF (RSX) has plummeted 65% in the last two weeks on monster volume. That rapid decline illustrates the risks of considering a focused fund as a long-term hold. In the portfolios of my Cabot ETF Strategist advisory, we hold certain sector funds to add alpha, but it’s crucial to understand when to take profits or cut losses.
One Other Momentum ETF
In the Undiscovered Portfolio, we hold some inverse ETFs as a way of capturing gains in a declining asset class. These vehicles, sometimes called “short ETFs,” return the opposite of an index’s performance.
These ETFs typically use derivatives or other hedging methodologies to generate that inverse performance.
As an example, here’s a fund that we don’t currently own, but illustrates the point of how inverse ETFs might be a good portfolio addition.
The Daily Dow Jones Internet Bear 3X Shares (WEBS) is up 8.23% in the past month. According to fund manager Direxion, this ETF seeks daily investment results, before fees and expenses, of 300% of the inverse of the Dow Jones Internet Composite Index’s performance.
So as tech in general has come under fire recently, this fund rallied. Specific to the Russia and Ukraine conflict, investors are concerned about the potential for cyberattacks that could undermine not only tech businesses, but many others.
Your approach to these ETFs, as with stocks, should be determined by your plan for any given security. Are you looking for a day trade, a swing trade, or a longer-term holding?
My approach has always been to view highly targeted ETFs as short- or medium-term holds. That’s the approach we take in the Cabot ETF Strategist. These targeted funds are holds to add alpha rather than deliver a risk-mitigated return over the long haul, to achieve a goal such as retirement.
To learn what ETFs we’re recommending today, simply click here.
What ETFs are you buying in response to the Russia/Ukraine conflict? Tell us about them in the comments below.
Kate Stalter, Chief Analyst of Cabot ETF Strategist, is a Series 65-licensed asset manager, with more than two decades of experience in various areas of financial services. As an investment advisor and financial planner, Kate personally manages client portfolios, with a focus on successful retirement, including asset allocation, income generation and tax strategies.Learn More