3 ETF's To Buy If You Believe Oil Is Heading Higher

Matt Thalman - INO.com Contributor - ETFs

In August of 2014 West Texas Intermediate Crude was trading around the $98 range. That was lower than the $105 range it traded in during June of 2014. Today it is trading below $40 a barrel and as oil continues to fall to new multi-year lows, some investors are wondering when the commodity will stop declining and begin once again moving higher. I recently published a piece pointing out a few ways investors can profit from oil continuing to decline. But, if you are like me, believing that the price of oil will eventually move higher from today's levels there are a few different ETF's you can buy to play a move higher in oil.

But first, let's discuss why I believe oil will move higher, sooner rather than later. Currently, West Texas Intermediate crude is trading below $40 a barrel and at that price most, of the oil producers are losing money. The average cost per barrel in the Canadian Oil Sands is somewhere in-between $50-$100 a barrel. In the North Dakota Bakken Shale, the average is around $40-$70 while in Texas it is somewhere around $40-$80 a barrel. In all of North America, only Alaska has a cost per barrel below $40.

The fact of the matter is that with oil at its current price, most exploration and production companies are losing money. That likely means we will soon see lower production levels, leading to a reduction in supply, and then an increase in the price of oil.

But for investors question still remain; such as, how fast will firms slow or even stop production, how long will it take for the current reserves to shrink, and how high will oil move once production is cut and supply falls?

But as most investors know, uncertainty is what creates opportunity. So if you do believe oil will move higher, buying today, could prove to be a great financial decision down the road. Now, what to buy?

For starters, the Energy Select Sector SPDR ETF (XLE) is a great choice for those investors who want to own what I would call a "safer" ETF in the energy sector. So what makes it "safer"? For starters, it only holds 40 energy stocks, all of which are part of the S&P 500. That means, when you buy XLE, you are buying the larger energy players who will, for the most part, be able to ride out downturns in the price of commodities like we are experiencing right now. XLE also pays investors a nice dividend currently yielding 3.3%. XLE is also one of the largest energy ETF's based on assets, which sits at over $10 billion. It also has nice trading volume making it very liquid and has an expense ratio of just 0.15%. A large, cheap, easily tradable ETF which only owns large cap stocks, and it's currently paying a solid dividend; what more can investors want? XLE down 13.55% over last month, down 24.57% over last three months, and 36.52.58% over the last year

Next I like the SPDR S&P Oil & Gas Exploration & Production ETF (XOP). The XOP focuses and strictly invests in oil and gas production and exploration companies; think Exxon Mobile (XOM) and Chevron (CVX). The ETF currently has 71 holdings, net assets of $1.28 billion, an expense ratio of just 0.35% and on top of all of that it currently yields 2.15%. XOP is a great way to play a rebound in oil and gas prices since the exploration and production companies have been the hardest hit by the recent downturn in those commodities.

Now if you are looking for something with slightly more upside, than you may want to look at the Direxion Daily Energy Bull 3X ETF (ERX). First, though, the ERX is a three-times leveraged ETF that is rebalanced daily, meaning investors will only receive triple the returns of the underlying index on a daily basis. Also, since this ETF is leveraged three times, if the market turns opposite of your trade, the damage will be significantly larger than a regular unleveraged ETF. ERX tracks the S&P Energy Select Sector Index, the same as XLE mentioned above, meaning that it will track the movements of the large US-based energy companies on a daily basis. ERX has an annual expense ratio of 0.98% and under $314 million in assets under management.

The last thing I would like to point out is that all three of the ETF's mentioned above are down more than 10% over the last month, 20% over the last three months and more than 50% over the last year. But that should be expected based on what the price of oil and the whole sector has down during the same timeframes. With that being said, an investor shouldn’t be looking at past performance as any indication of what these ETF's will do in the future. They should base their investment decisions on whether or not they believe the price of oil will move higher in the future.

Matt Thalman
INO.com Contributor - ETFs
Follow me on Twitter @mthalman5513

Disclosure: This contributor held no positions in any of the stocks mentioned in that article at the time this blog post was published. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.

One thought on “3 ETF's To Buy If You Believe Oil Is Heading Higher

  1. I believe. Will continue to hold TOT, CVX, PBR, all of which I am currently down with...

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