May 13, 2008 at 3:00 pm by Tom Lydon
The retreat of oil service-focused exchange traded funds (ETFs) yesterday was a reminder for investors to not get so hung up on the price of oil that they ignore all else.
While funds such as United States Oil (USO) undoubtedly benefit from the rising prices, other funds feel the affects whether prices go up or down, too, so be sure to look around if oil pulls back and make sure the ETFs you’re holding aren’t getting dragged. It isn’t always the most obvious ETFs that are affected - sometimes the impact can extend beyond them.
Some of the oil service-related ETFs are:
- iShares Dow Jones US Oil & Gas Exploration Index (IEO), up 19.4% year-to-date
- Oil Services HOLDRs (OIH), up 7.7% year-to-date
- SPDR S&P Oil & Gas Equipment Services (XES), up 14.4% year-to-date
Oil and gas today have hit new records, reports John Wilen for the Associated Press. Analysts are beginning to wonder if gas prices will stick to their old pattern of peaking around Memorial Day, then steadily declining as summer deepens. The cost of gas can be hedged with United States Gasoline (UGA), which is up 17.7% since its Feb. 28 inception.
The rising prices seem to be eating into demand for oil and petroleum products in the United States and Europe. Maybe that will bring prices back down from the stratosphere.
The prices have given
top performances to natural gas and the energy sector for 2008, and
this will only continue if there’s truth in analysts’ predictions that oil will rise to $200 for a barrel in the near future.
The United States Natural Gas (UNG) has
risen the most year-to-date with a 42.6% return, according to
Morningstar. Supply and inventory issues are pushing the ETF the right
direction as many anticipate higher oil prices. UNG can also be used as
a hedge for energy exposure, and tracks in percentages the movement of
natural gas futures on the NYME, explains John Spence for The Wall Street Journal.
The fast growth in the oil and gas sectors has many suspecting we’re in a bubble ready to burst, including Michael Kahn for Barron’s. Are we? Only time will tell. The surest way to protect yourself on the downside is by having your exit strategy firmly in place if and when the downturn begins. In the meantime, don’t fight the trend.
