Oil ETFs, or exchange-traded funds, are on the move. Spurred by a historic rotation from growth to value in the wake of the election and positive vaccine news, money is flooding back into energy stocks. The return comes after months of absolute and relative weakness. In celebration of the Street’s sudden love for the long-hated sector, we’re identifying the best vehicles you can use to capitalize.
Oil prices have had a tumultuous 2020. Despite the record-setting volatility playing out in the stock market, oil stands apart as the hardest hit asset on the planet. It’s certainly the only one that momentarily went below zero while living to tell the tale. Threats of bankruptcy have loomed over the sector for most of the year. The gloom has weighed on every single company, causing them to remain near their lows even while the S&P 500 has pushed to new highs.
But if the past two weeks are any indication, a desperately needed recovery effort is underway.
That said, here are my favorite three oil ETFs to buy if you think the fresh strength has legs.
- Energy Sector SPDR (NYSEARCA:XLE)
- S&P Oil & Gas Exploration & Production ETF (NYSEARCA:XOP)
- VanEck Vectors Oil Services ETF (NYSEARCA:OIH)
All three charts look similar but offer a slightly different bent to the exposure. Let’s take a closer look at the price levels worth watching and which trades you should consider.
Oil ETFs to Buy: Energy Sector SPDR (XLE)
XLE is the big dog in the industry. It boasts the highest average daily volume, which currently stands at 30 million shares. It’s also one of the few oil ETFs that didn’t have to undergo a reverse split after this year’s disastrous drop. If you look at its top holdings, you’ll notice the reason for the slight outperformance compared to the rest of the industry ETFs. Exxon Mobil (NYSE:XOM) and Chevron (NYSE:CVX) comprise over 40% of the fund.
As the two giants of the sector, they’ve held up better (at least on a relative basis) than the hundreds of smaller companies that have been trampled.
From last month’s trough, XLE has risen 34% to touch its falling 200-day moving average for the first time in 2020. It’s overbought in the short run, but make no mistake, this is now a sector worth buying on weakness.
The Trade: Buy the Feb $35 calls for around $3.10.
S&P Oil & Gas Exploration & Production ETF (XOP)
For those looking for an oil ETF not as dominated by Exxon and Chevron, XOP is worth consideration. Since its constituents have much smaller market caps — especially these days! — its volatility runs hotter than XLE. This can work to your advantage if you’re on the right side of its swift moves.
Like its predecessor, XOP has scored big gains in recent weeks. Since last month’s trough, the fund has rallied 38%. Along the way, it blasted through the 50-day and 200-day moving averages. It’s the first time this year that the XOP ETFs has seen the high side of the 200-day. Two significant accumulation days developed as well, to confirm institutions’ return.
With prices up three of the last four days, I’d prefer a pullback before plowing in. Naked puts are my weapon of choice here.
The Trade: Sell the Dec $45 put for 55 cents.
VanEck Vectors Oil Services ETF (OIH)
OIH got wrecked this year in a continuation of the downtrend that began in 2014. From peak to trough, the fund has fallen 94%, effectively pricing in everything but Armageddon. The severity of the hacking necessitated a reverse split, which lifted prices back from the lowly levels they had fallen to.
Options traders welcomed the price levitation because it makes building trades far easier. Of all three of today’s selections, OIH is the most volatile by a mile. If you’re seeking a high-octane ticker destined to fly or die alongside crude prices, it’s this one.
I’d echo my comments on XOP regarding the overbought conditions arising. A pullback or pause will create better entry points. Bull puts offer a high-probability way to play.
The Trade: Sell the Dec $120/$115 put spread for $1 or more.
On the date of publication, Tyler Craig did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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