3 ETFs for a Future Oil Recovery

03/23/2020 5:00 am EST

Focus: ENERGY

Chris Preston

Investment Analyst, Cabot Wealth Network

Oil prices are dirt-cheap right now. When they inevitably recover, here's an efficient way to play the rally, asserts Chris Preston, editor of Cabot Wealth Network.

Energy stocks, already in the dumps after months of losses, fell even further, as the sector is down an astonishing 65% already this year. There’s nowhere to go but up, right? You would think. But individual energy stocks seem too unpredictable at the moment. Oil ETFs are a more efficient way to play the eventual rebound.

We’re stock pickers. We prefer to recommend individual stocks — growth stocks, value stocks, small cap stocks, etc. However, there are occasions when we recommend exchange-traded funds (ETFs).

One of those occasions is when there’s a red-hot or rebounding sector and you want to take full advantage of its momentum. Rather than pick one or two stocks, it can make sense to buy an ETF that tracks a whole basket of stocks in that sector.

That’s why oil ETFs will be your best option when energy stocks finally get off their knees. When it happens, here are three you should consider.

iShares U.S. Oil & Gas Exploration & Production ETF (IEO)

As the name suggests, this ETF holds oil and gas companies specifically focused on exploration and production. It counts ConocoPhillips (COP), Marathon Petroleum (MPC) and EOG Resources (EOG) among its 10 largest holdings (out of 100).

Right now, the IEO is the dog’s dinner — down 53% year to date. However, when oil prices were on the rise from 2016-2018, up 79%. When oil prices get going again, so will this oil ETF.

United States Oil Fund LP (USO

USO is the best pure-play fund that tracks crude oil prices; it’s the largest, most liquid of futures-backed oil ETFs, with 28 million shares exchanging hands daily and roughly $1.4 billion in assets.

Over the past five years USO has had a 0.96 correlation (1.0 is the highest) with crude. That’s a bad thing now – USO is down 45% year to date. However, when oil prices finally bottom, this is the purest way to buy the rebound.

PowerShares DB Oil Fund (DBO)

This one’s a bit more niche, but it’s based on the value of crude oil futures contracts, which is where the DBO invests 100% of its assets. When oil prices rise, this fund rises even faster.

From January 2016 through October 2018, the DBO more than doubled in price. It’s down 35% year to date, but when the sector bottoms, this will be one of the first oil ETFs to get moving, since it invests in oil futures.

Bottom line: Right now, you shouldn’t touch any of these oil ETFs. Never try and catch a falling knife, as they say. However, the worst of the energy sell-off is likely over, and oil prices aren’t likely to go lower despite the Saudi Arabia-Russia standoff.

Look for energy stocks to build a bottom until crude prices start to creep up again. When it happens, there’s money to be made in these three oil ETFs.

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