by Traders Reserve | June 18, 2012 8:30 am
If you knew you could get a 30% return in a sector over the next year, would that be something that you might be interested in? Rational investors are nodding their heads in agreement right now, so if you are too, then it’s time you start looking seriously at that sector . . . and that sector is the beaten-up energy space.
Yes, oil prices are down big, with the price of crude sinking over 20% so far this year. A combination of a supply gut and slack demand have teamed up to put heavy downward pressure on energy-related commodities. Yet despite the losses in the space — or perhaps because of them — the energy bulls are coming out of the proverbial woodwork. Recently, none other than Goldman Sachs (NYSE:GS) issued a report that predicted a 29% return over the next year from the Standard & Poor’s GSCI Enhanced Commodity Index, an index led by energy and industrial-metals.
According to Goldman analyst Jeffrey Currie, European policy makers will be able to contain the euro-area debt crisis, while recovery in the U.S. and China will continue — and that confluence of factors will be a big driver for commodity prices going forward. I suspect that Currie’s thesis is accurate, and given the selling we’ve seen in energy commodities this year, exchange-traded funds (ETFs) pegged to the sector’s fortunes are selling at a very attractive price. Here are four ETFs for the coming energy boom.
The Energy Select Sector SPDR (NYSE:XLE) is one of the biggest, and one of the most beaten-up, ETFs in the energy space. The fund includes hefty energy concerns such as Exxon Mobil (NYSE:XOM), Chevron (NYSE:CVX) and Schlumberger (NYSE:SLB). Over the past three months, XLE is down nearly 14% (through June 12), as investors have dumped the sector for fear of a European-induced slowdown. The upside here is that stocks in the sector now trade at about 10 times earnings. This is extremely cheap, especially when you realize you’re buying some of the most profitable companies ever. Owning XLE also delivers a solid yield of 1.7%, which while not huge, still makes this fund attractive for income investors.
If you want to play the direction of crude oil prices, then the United States Oil Fund (NYSE:USO) is the ETF for you. This fund doesn’t hold energy stocks, or exploration stocks, or anything save for futures contracts designed to approximate the spot price of West Texas Intermediate (WTI) light, sweet crude oil. This is the key measure of oil prices in the U.S., so that means that when the price of oil begins rising, so too will this fund. A word of caution: USO is designed to track the price of crude, but sometimes it’s a bit off, and that can slant your investment results.
The ProShares Ultra DJ-UBS Crude Oil (NYSE:UCO) is a short-term trading vehicle for those who are really bullish on oil. The fund seeks to deliver the performance equal to twice the daily performance of the Dow Jones UBS Crude Oil Subindex. Basically, this is a leveraged bet on the spot price of oil.
The value of this fund has been slammed of late, and over the past three months UCO is down more than 40%. Yet given the two-beta structure of this fund, it can be used to supercharge your gains in the energy space when the bull is running loose in the sector.
When oil prices are surging, UCO is a good place for your short-term money.
Much like oil, the metrics of increased supply and dampened demand have come together to cause prices in the natural gas space to plummet. Natural gas, as measured by the United States Natural Gas ETF (NYSE:UNG) is down 40% year to date. This fund is a pure play on the spot price of natural gas, which has been a big loser this year.
However, with natural gas now trading at historic lows, now is the time to build a position — before the boom in this energy sector takes place. That boom could very well be fueled by new technologies enabling U.S. companies to cost-effectively increase exports of liquefied natural gas promises to be a big boom for stocks in the space. According to the Energy Information Administration’s
Early Release Annual Energy Outlook report for 2012, the United States is projected to become a net exporter of liquefied natural gas in just a few years. When this happens, demand for natural gas will soar — as will the value of UNG.
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