Oil Price Tumbling: 3 Top Ranked Energy ETFs to Buy
Oil has been performing appallingly over the past few months on sluggish demand, booming oil production, abundant supply and a strengthening dollar. Additionally, the bearishness in the overall energy sector and global growth concerns are putting pressure on the energy stocks.
This is especially true as oil production in the U.S., the largest oil consumer, soared to the highest level in 28 years in September and is expected to grow nearly 15% this year and 12% in the next as per the U.S. Energy Information Administration (EIA). Oil production in the U.S. will likely reach a 45-year high in 2015. Further, the agency reduced the global oil demand forecast to 91.47 million barrels per day from 91.55 million for this year and 92.71 million barrels per day from 92.89 million for the next.
Meanwhile, the International Monetary Fund (:IMF) cut its global economic growth for the third time this year to 3.3%, citing persistent weakness in the Euro zone, Japan, and key emerging and developing markets like Brazil, Russia and the Middle East. A weak economy in turn would lead to soft global oil demand (read: Oil & Gas ETF Investing 101).
Notably, U.S. crude plunged as much as 20% since June while Brent dropped to around $91 per barrel from the multi-year high of $115 per barrel reached in the same month with some forecasting more decline in the days ahead. This suggests that the global oil market is on the verge of a crucial shift from an era of scarcity to abundance.
In such a backdrop, energy ETFs have seen terrible trading with products losing double digits over the past one month. The beaten down prices have made these products inexpensive at current levels, suggesting a solid entry point for investors. In particular, products tracking the broad energy space have been inspiring as favorable production trends and geopolitical tensions are expected to fuel rally in the coming days (see: all the energy ETFs here).
Given this, investors may want to consider cycling into the energy space in order to obtain a nice momentum play at a cheaper price. While looking at individual companies is certainly an option, a focus on top ranked energy ETFs could be a less risky way to tap into the same broad trends.
Top Ranked Energy ETFs in Focus
We have found a number of ETFs that have the top Zacks ETF Rank of 1 (Strong Buy) in the broad energy space and are thus expected to outperform in the months to come (read: all the Top Ranked ETFs).
Among these top ranked ETFs, we pick the following three as good choices to tap into the space. This trio has enjoyed a strong momentum and has potentially superior weighting methodologies which could allow these to continue leading the energy space in the months ahead.
Vanguard Energy ETF (VDE)
This fund manages a $3.1 billion in asset base and provides exposure to a basket of 163 energy stocks by tracking the MSCI US Investable Market Energy 25/50 Index. The product charges a low fee of 14 bps per year from investors and is tilted toward large cap stocks. Volume is good as it exchanges more than 185,000 shares a day. Exxon Mobil (XOM) and Chevron (CVX) dominate the fund’s return at 19.9% and 11.5%, respectively, while other firms make up for less than 7% of assets.
From a sector look, integrated oil & gas make up for the largest share at 36.6% of assets closely followed by exploration and production (28.5%), and equipment services (17.8%). The product lost 7.1% over the past one month.
Energy Select Sector SPDR (XLE)
This fund follows the S&P Energy Select Sector Index and holds 43 securities in its basket. Like Vanguard counterpart, it focuses on large cap stocks and is largely concentrated on Exxon and Chevron with 15.7% and 13.1% of assets, respectively. In terms of industrial exposure, integrated oil & gas takes 34% of assets while exploration and production, and equipment services round off the top three.
XLE is the largest and most popular ETF in the energy space with AUM of $9.7 billion and average daily volume of 9.9 million shares per day. The fund charges 16 bps in annual fees from investors and is down over 7% over the past one month (read: Power Your Portfolio with These 3 Energy ETFs).
PowerShares DWA Energy Momentum Portfolio (PXI)
This fund provides exposure to 34 energy stocks having positive relative strength (momentum) characteristics by tracking the DWA Energy Technical Leaders Index. It has accumulated $235.9 million in its asset base and trades in small volume of less than 37,000 shares per day. Expense ratio came in at 0.60%.
Unlike the other two funds, PXI is pretty spread out across securities as none of them holds more than 6.10% of assets. Additionally, the fund is widely diversified across various market caps with 39% going to large caps, 37% to small caps and the rest to mid caps. The product is skewed toward oil, gas and consumable fuels at 82.2% while equipment and services account for 14.6% share. The ETF lost 11% in the past one month.
Bottom Line
Though the above-mentioned energy funds have seen rough trading in recent weeks, the geopolitical risks arising from the conflict in Ukraine, Iraq instability, protest in Hong Kong and Ebola in West Africa might drive the oil price higher, and inject new life to the oil stocks and the ETFs (read: Hong Kong ETFs in Focus on Huge Pro-Democracy Protests).
As a result, investors shouldn’t forget the energy space and should take a closer look at a few of the top ranked ETFs in this segment for excellent exposure and some outperformance in the months ahead.
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Read the analyst report on PXI
Read the analyst report on XLE
Read the analyst report on VDE
Read the analyst report on XOM
Read the analyst report on CVX
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