A lot has happened in these last two pandemic years.
We’ve been through the most stringent lockdowns in American history - and the largest protests in American history. We’ve seen the largest 1-day drop in the history of the Dow Jones Industrial Average - and countless all-time highs.
And the price of a barrel of oil has literally gone from zero to a hundred.
In early February 2022, the dated Brent crude benchmark, which measures the price of North Sea oil cargoes marked for delivery, topped $100 per barrel for the first time since 2014.
Banks believe that oil is likely to stay over $100 in the first half of 2022 - and some are predicting even higher prices. RBC Capital Markets believes that it will hit $115 or higher this summer, while J.P. Morgan recently said that oil is “likely to overshoot to $125.”
A rapid recovery in travel volumes, OPEC underproduction and the threat of conflict between Russia and Ukraine have created a perfect storm of upward pressures on oil futures - and many investors are looking to capitalize.
Actual futures contracts are rather unwieldy instruments for individual investors, as they’re often sold in denominations that would be impractically large for one person to buy. Fortunately, a variety of exchange-traded funds (ETFs) are available which allow investors to bet indirectly on commodities like oil.
Today we’re looking at four ETFs which could help investors profit from over-$100 oil prices - two of which represent a straightforward approach to the trend, and two of which represent a contrarian approach…
The Straightforward Plays: Oil ETFs
It probably doesn’t need to be explained that one of the easiest ways to invest in oil is through ETFs which directly track the price of oil, or the stock prices of its producers.
In this section, we’re looking at two funds which track the major oil benchmarks quite closely. And after years of low prices, both funds have price-to-earnings (P/E) ratios well below that of the S&P 500.
United States Oil Fund (NYSE: USO)
The United States Oil Fund directly tracks the performance of the West Texas Intermediate (WTI) oil benchmark by investing in WTI futures.
Because the fund invests directly in futures contracts, it has no yield, and a relatively-high expense ratio of 0.83%. But its high volume makes it easy to trade without liquidity worries - more than 7 million USO shares change hands each day.
SPDR S&P Oil & Gas Exploration & Production ETF (NYSE: XOP)
The SPDR S&P Oil & Gas Exploration & Production ETF is a basket of the oil-producing firms in the S&P 500. Its top holdings include major oil exploration names like Callon Petroleum (NYSE: CPE), SM Energy (NYSE: SM) and Occidental Petroleum (NYSE: OXY).
The fund pays a 1.43% yield, and has a relatively low expense ratio of 0.35%. It also has even higher volume than USO - more than 8 million XOP shares are traded daily.
The Problem With The Straightforward Approach
As we’ve discussed, these two funds provide investors a fairly reliable way to follow the trend of rising oil prices.
But “follow” is an important word here - this strategy is fundamentally reactive.
What’s more, if you look at how these funds follow the oil benchmarks over a longer timeframe, you’ll notice that they tend to experience the same magnitude of losses - but smaller gains, as a consequence of their overhead expenses.
And it’s worth noting that none of the factors which are pushing oil upwards are necessarily persistent. OPEC could increase production. Russia and Ukraine could put down their arms. The White House could push through climate legislation which reduces domestic demand for oil.
Fortunately, there’s another way to play high oil prices. There’s another family of funds which are weakly correlated with oil prices in a surprising - and potentially-more-lucrative - way…
The Contrarian Plays: Electric Vehicle (EV) ETFs
When we talk about the investment implications of high oil prices, it’s easy to forget the consumer implications.
Drivers don’t like paying higher prices at the pump - and research has shown that they lose interest in gas-guzzling trucks and SUVs during high-price periods, turning to more fuel-efficient vehicles - or even electric vehicles - instead.
As a result, many EV ETFs loosely follow the price of oil in their movements - but without the overhead drag which afflicts many oil ETFs.
In this section, we’re looking at two EV ETFs which can be used as a proactive way to play high oil prices. As you can see above, both have taken a tumble in the last few weeks, amid a general selloff in growth stocks.
But you can also see that in the long-term, these EV ETFs follow the general contour of the oil benchmarks - but with smaller losses, and much larger potential gains.
KraneShares Electric Vehicles & Future Mobility Index ETF (NYSE: KARS)
The KraneShares Electric Vehicles & Future Mobility Index ETF is a basket of pure-play EV companies and component manufacturers. Its top holdings include China’s Amperex, Nio (NYSE: NIO) and Tesla (NASDAQ: TSLA).
The fund pays a modest 0.12% yield and has a middling 0.7% expense ratio. One thing to watch out for is relatively-low volume - only about 100,000 KARS shares are traded each day.
Global X Lithium & Battery Tech ETF (NYSE: LIT)
The Global X Lithium & Battery Tech ETF focuses more specifically on the lithium-ion battery technology which powers EVs. Its top holdings include Albemarle (NYSE: ALB), Amperex and BYD (OTC: BYDDY).
The fund pays a respectable 0.17% yield, has a medium-high 0.75% expense ratio, and a comfortable amount of volume (over 1 million), meaning that investors don’t have to worry about liquidity issues.
Oil prices are likely to stay in the triple-digits for the next few months - but even the most talented bank analysts can’t predict the future. We hope that these two investment approaches have helped you position yourself for profits, no matter where oil prices go next.
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