by Jim Woods | March 7, 2012 7:00 am
Maybe it’s a leap-year thing: Both oil prices and pump prices have soared this year, just as they did four years ago.
I remember when oil prices surged to $147 a barrel during the summer of 2008 and nearly everyone was wailing about the high cost of gas. I told my fellow investors then that the best revenge for the high price of gas was to fill your portfolio with energy sector exchange-traded funds (ETFs) that were benefiting from the oil-price gusher. One leap year later, my advice is the same. The rising cost of crude and the concomitant rise in gasoline prices mean that now is the time to position your trading portfolio accordingly. (See my recent article on energy ETFs.)
Energy Select Sector SPDR ETF (NYSEARCA:XLE) is the granddaddy of all energy funds, as it boasts the most assets (over $8.7 billion) and holds the biggest companies in the energy space. This fund includes companies that develop and produce crude oil and natural gas, as well as those that provide drilling and other energy-related services. Top holdings in XLE include ExxonMobil (NYSE:XOM) Chevron (NYSE:CVX), ConocoPhillips (NYSE:COP) and Schlumberger (NYSE:SLB). In February, XLE rose about 6.2%, and if oil prices continue trading over $100 a barrel, look for more gains in the fund in March.
When the price of oil is high, it pays to get more of it out of the ground, and that’s what the companies in the SPDR Oil & Gas Exploration & Production ETF (NYSEARCA:XOP) do best. The fund holds stocks such as Cobalt International Energy (NYSE:CIE), Clean Energy Fuels (NASDAQ:CLNE) and Magnum Hunter Resources (NYSE:MHR), just to name a few. In February, XOP gave investors a 9% gain. And, just as with the Energy Select Sector SPDR ETF, if oil prices remain high, XOP will keep pumping out profits.
The rising price of oil doesn’t require you to invest in energy or exploration stocks to make a profit. In fact, why not go straight to the source and add the United States Oil Fund ETF (NYSEARCA:USO) to your trading portfolio? This ETF is a pure play on the price of oil, and particularly the spot price of West Texas Intermediate (WTI) light, sweet crude oil. Last month, USO greased investors’ palms with a 6.9% gain. If you think the oil surge will continue, think about taking a tour with the USO.
ProShares Ultra DJ-UBS Crude Oil (NYSEARCA:UCO) is a short-term trading vehicle for those who are really bullish on oil. The fund seeks to deliver performance equal to twice the daily performance of the Dow Jones UBS Crude Oil Subindex. This is a leveraged bet on the spot price of oil, and last month, that bet paid off big time for intrepid investors. UCO surged 13.4% in February, and this is where the real trading profits have been made in the sector. If oil keeps on driving higher, this fund will see some serious profits.
Every dog has its day, and nearly every sharp oil spike is followed by a sharp pullback in crude prices as the market tries to regain its equilibrium. When that happens this next time, we are likely to see the price of crude fall sharply. Taking advantage of this likely outcome is easy with the United States Short Oil Fund (NYSEARCA:DNO). This is basically the inverse of USO, as it is a fund designed to rise proportionally to the price decline in light, sweet crude oil. When the oil pullback begins, DNO could very well be a profitable shelter from that storm.
This story was originally published on Traders Reserve.
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