May 06, 2008 at 10:00 am by Tom Lydon
Admit it - you’re tempted to invest in some energy exchange traded funds (ETFs). After all, gas and oil are hitting record highs and rising.
It’s only natural that you would be, because investors tend to buy what they know. The United States, McDonald’s, Disney, Target and so on. There’s comfort in the familiar.
But trying to profit from energy isn’t without its pitfalls, says Tim Paradis for the Associated Press. Many investors already invest in the sector by owning stock of the biggest oil companies, while others dive right into the commodities market and trade futures contracts.
One portfolio manager warns that the corrections in this sector can be brutal. Since 2004, he says, there have been at least two big corrections per year.
And then there’s this paradox: those hardest hit by skyrocketing energy aren’t likely to have lots of extra cash sitting around with which to invest.
Before you decide to get into the energy sector, look at the fundamentals and not this recent run. In oil’s favor is that refining capacity is strained, there are supply disruptions, the dollar is weakening and speculators will push the price higher. On the other hand, demand for petroleum products fell 8.5% in February from January, while gas demand fell 6.2%.
And above all, always be sure to have your exit strategy in place if one of those big corrections occur.
Some ETFs that grant access to energy are:
- United States Oil (USO): up 23.3% year-to-date
- United States Gasoline (UGA): up 13.5% year-to-date
- iShares Dow Jones U.S. Energy Sector Index Fund (IYE): up 3.4% year-to-date
- Rydex S&P Equal Weight Energy (RYE): up 4.9% year-to-date
Read the disclaimer, as Tom Lydon is a board member of Rydex Funds.
Tags | Energy, Gas, Natural Gas, Oil, USO
May 7th, 2008 at 7:07 pm
Bought UGA when gas at the pump was around 3.00 I estimated what my wife and I use for the year and bought that amount in uga. I don’t know if it will correlate dollar for dollar but I think it will come close. If gas at the pump goes up my fund should go down and vice versa. In effect I think I have locked in 3.00 for the year. When gas goes up it doesn’t bother me much at all. At least for a year.
May 13th, 2008 at 6:19 pm
What ETF is made up of large cap growth stocks Chevron, ExxonMobil, ConocoPhillips, and Occidental?
May 14th, 2008 at 7:45 am
William,
The Energy Select Sector SPDR (XLE) has those companies in its top five holdings, as well as the iShares Dow Jones US Energy (IYE). The iShares S&P Global Energy (IXC) has those companies in its top ten.