by While analysts are busy explaining the impact of the November 8 US election on oil prices, China’s zero-covid policy going forward, inflation, production and inventory numbers, exchange-traded funds (ETFs) are a great way to play amid high commodity prices. global energy crisis and conflict in Europe. Most, but not all, ETFs are passive, and passive investing has been leveraged to keep going outperforms its more active brethren in the current period of heightened uncertainty.
An ETF boom has gripped financial markets, with exchange-traded funds enjoying the lion’s share of investment dollars worldwide — even as investors continue to flock to passive funds and shun actively managed mutual funds.
The following funds can help you hedge against inflation and geopolitical uncertainty.
Energy Select Sector SPDR ETF
AUM: $42.8 billion
Expense ratio: 0.11%
Dividend yield (FWD): 3.45%
YTD return: 54.7%
Over $40 billion in assets under management (AUM), Energy Select Sector SPDR ETF (NYSEARCA:XLE) is the largest energy fund. It is also the most liquid and one of the cheapest, with an expense ratio of just 0.11%.
XLE follows the price and profit development of companies Energy Select Sector Index. The index offers investors broad visibility in companies in the oil, gas and energy equipment industry.
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Another major attraction: the ETF has a respectable dividend yield (FWD) of 3.45%.
However, one of its shortcomings is that the ETF only has 26 stocks in its portfolio ExxonMobil (NYSE: XOM) and Chevron Corp.(NYSE: CVX) is overrepresented and accounts for more than 40% of the total portfolio value.
Vanguard Energy ETF
AUM: $11.0 billion
Expense ratio: 0.10%
Dividend yield (FWD): 3.23%
YTD return: 54.9%
Vanguard funds are traditionally known for undercutting the cost competition Vanguard Energy ETF (NYSEARCA:VDE) has stayed true to this principle by offering the lowest price in the industry.
At 110 stocks—albeit with significantly less AUM than XLE—VDE is much better diversified than XLE, though XOM and CVX still have large roles with 22.4% and 16.2% weights, respectively.
VDE monitors performance MSCI US Investable Market Index (IMI)/Energy 25/50an index composed of stocks of large and mid-sized US energy companies.
United States Oil ETF, LP
AUM: $2.1 billion
Expense ratio: 0.83%
Dividend yield (FWD): Not used
YTD return: 30.7%
The United States Oil ETF, LP (NYSEARCA: USO ) seeks to track daily percentage changes in the spot price of light sweet crude oil delivered to Cushing, Oklahoma. USO invests primarily in futures contracts for light, sweet crude oil, other types of crude oil, diesel heating oil, gasoline, natural gas and other petroleum-based fuels.
In April 2020, the USO gained notoriety after becoming the worst oil price crash in history. WTI futures fell a painful 310% to -$38.45 a barrel, marking the first time a US crude oil futures contract went negative – and making any seemingly unlikely “negative oil” predictions suddenly look prescient.
A negative oil price is an absurd notion that basically means that producers would be paying traders to take oil off their hands. USO, the nation’s largest long-only crude-only exchange-traded fund (ETF), was blamed for the collapse, owning 25% of the outstanding May WTI oil futures contract.
Fortunately, such mayhem is unlikely to happen again USO moved 20% of its holdings in WTI contracts to later months in an effort to reduce volatility. And there is no possibility of negative oil right now.
Direxion Daily S&P Oil & Gas Exp. & Products. Bull 2x Shares ETF
AUM: $800.6 million
Expense ratio: 0.95%
Dividend yield (FWD): 0.39%
YTD return: 84.3%
The Direxion Daily S&P Oil & Gas Exp. & Products. Bull 2x shares (NYSEARCA: GUSH ) is an exchange-traded fund launched in May 2015 by Direxion Investments.
GUSH invests in the US public stock market. The fund uses derivatives such as futures and swaps to create its portfolio and invests in growth and value stocks of diversified market capitalization companies. It aims to track 2x daily performance S&P Oil & Gas Exploration & Production Select Industry Index (SPSIOP). As a leveraged fund, GUSH is prone to wild daily swings, especially when oil prices are volatile.
Inverse ETFs
Inverse and inverse leveraged ETFs create an inverse short position or leveraged inverse short position in an underlying index using swaps, options, futures contracts and other financial instruments. Due to its compounding effect, investors can enjoy higher returns in the short term if the trend prevails.
Short sellers have now resorted to trading inverse ETFs, which appeal S&P 500 like ProShares UltraPro Short S&P500 (SPXU), UltraPro Short Russell2000 (SRTY), Daily Dow Jones Internet Bear 3X Shares( WEB), ProShares UltraPro Short QQQ (SQQQ), and ProShares UltraPro Short Dow30 (SDOW). All of these inverse ETFs are green, and WEBS has actually outperformed with a 201.7% return YTD.
By Alex Kimani for Oilprice.com
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