Yahoo Finance ETFs for Nervous Energy Investors
Oil has been on a wild ride lately, giving energy investors a serious case of the jitters. With OPEC trying to curb production (and thus raise prices) and U.S. fracking companies boosting production, oil and gas investors are mulling a big question: What's the best energy play for 2017?
For now, crude oil seems to be in a holding pattern.
On Feb. 22, crude oil was priced at $53.50 per barrel -- a hovering point where prices have been locked in between $52 per barrel and $56 per barrel since mid-December 2016, following a solid run-up earlier that month from $48 per barrel. Prices did rise to $56.80 on Feb. 23, as U.S. crude oil stocks are beginning to weaken.
[See: The Best Energy Stocks to Buy for 2017.]
Oil traders are vexed over a number of issues, most recently poor compliance with oil production limits. Last week, Mohammed al-Sada, Qatar's oil minister, noted that oil-producing nations outside of OPEC had yet to begin curbing production, despite an agreement to do so in late 2016.
The outlook is fairly positive yet cautious. According to London-based Wood Mackenzie, the oil and gas industry will turn cash-flow positive for the first time since the downturn, but with this caveat: if OPEC production cuts drive oil prices above $55 per barrel.
"Most oil and gas companies will start 2017 on a firmer footing, having halved cash flow break-evens to survive the past two years," wrote Tom Ellacott, senior vice president of corporate analysis research at Wood Mackenzie, in a recent research note. "Further evidence of a cautious, U-shaped recovery in investment should emerge."
For regular investors, sluggish oil prices aren't exactly driving them to oil stocks and funds. But that outlook might be displaced, especially on the exchange-traded fund side of the oil industry investment market.
"We can expect oil to continue to be choppy as the market balances OPEC production cuts with U.S. production and inventory glut," says Luke Glofcheskie, a money manager at Echelon Wealth Partners.
"Depending on your appetite for risk, there are leveraged ETFs," he says. "But the key themes that will drive the energy market are the global growth outlook and whether the OPEC production cuts actually manifest."
Oil investors have every right to be cautious, given the current oil marketplace, other experts say.
"A nervous investor is a smart investor," says Clem Chambers, chief executive officer of ADVFN, a global stocks and shares website. "Risk might equal reward, but it also equates to mean financial bumps along the way."
Consider ETFs and MLPs. There are ways for an anxious investor to engage in the sector.
"Exchange-traded funds were created to give investors a broad diversification over the market at an ultra-cheap price," Chambers says. "By buying the whole index in a single fund, the investor captures the long-term returns of the market."
While investing in oil, gas or any single-theme ETF involves market timing, sector selection and an element of trading -- the antithesis of passive investing -- investors can still leverage passive funds in the oil and gas market, Chamber says.
[See: Oil ETFs: 8 Ways to Invest in Black Gold.]
"For example, you might use an oil ETF to be diversified in oil and lean your portfolio more heavily toward that sector," he says. "That would shift your portfolio weighting toward that theme a bit without throwing your capital into the crucible of gambling."
One potential industry entry point are pipeline-themed oil and gas funds, including the Tortoise North American Pipeline Fund ( TPYP). TPYP is weighted to energy firms (86 percent), while utilities are second at about 14 percent. Its expense ratio is 0.40 percent, or $40 per $10,000 invested.
Another option is the Global X Master Limited Partnership ETF ( MLPA), which recently reached the $500 million mark and has performed well due to similar factors: advances in the Keystone XL and Dakota Access pipelines and the recent OPEC cutbacks. MLPA is wholly devoted to the energy sector. It has an expense ratio of 0.45 percent.
"MLPs have recently performed well while also providing consistent yield," says Jay Jacobs, director of research at Global X Funds, a New York-based ETF issuer. "The Solactive MLP Infrastructure Index finished 2016 up 20.1 percent, outperforming the S&P 500 by 8.1 percent in 2016."
Since the period of heightened volatility in early 2016, MLP market volatility has stabilized at just below 20 percent, two-thirds lower than the peak, Jacobs says.
"In addition, correlations between MLPs and other asset classes fell considerably as investors weighed the ramifications of the late-November OPEC agreement," he says. "We have found that when oil prices rise, correlations between MLPs and crude decrease."
A bearish viewpoint. If you're bearish on the energy sector, you have company in Jeff Bishop, ETF specialist at Raging Bull, an online stock market trading site.
"You'll hear a lot of oil bulls out there right now," Bishop says. "But I am not in that camp."
Bishop thinks oil is going lower, and oil companies are going lower with it.
"It's unlikely that we would see a meaningful increase in oil due to new speculative buying, since it has had very little effect on oil prices so far," Bishop says.
"Plus, we're now approaching volatility levels not seen since right before oil prices crashed in 2014," he adds. "The market is overly complacent right now."
[Read: How to Find the Best Oil Stocks to Buy Now.]
Overall, Bishop says there are a lot of headwinds against oil, including the OPEC production curb issue, and he predicts "moderately lower prices in the coming year."
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