Is it Time to Get Into Energy ETFs?

February 7th at 8:29am by Tom Lydon

The energy sector is in focus as production in the U.S. is on the rise. Exchange traded funds are the best way to play this sector as it climbs, and the U.S. has a chance to become the number one oil producer by 2020.

“A remarkable rise in oil production in the U.S. once again lured the global energy firms to the U.S. market. If the current trend continues the U.S. may become the world’s biggest producer of oil five years down the line,” Zacks Equity Research wrote.

Over the past two months, oil prices have moved from $87 per barrel to $96 per barrel, confirming the uptrend of the sector. In the U.S., oil production is up an average 1.3 million barrels per day, a 22% increase from one year ago, reports Paul Baiocchi for Forbes. U.S. energy companies have the capacity to gain profit as OPEC has cut production and the U.S. now has the chance to become energy independent. [Energy ETFs Outperforming on Higher Oil Prices]

The Energy Select Sector SPDR (NYSEArca: XLE) is up 8% year-to-date, and tracks 43 of the largest U.S. energy companies. In 2012, XLE gained 5.21% for the year. About 80% of the portfolio focuses in on oil and gas companies while the remainder of the fund tracks oil production companies. The iShares U.S. Energy ETF (NYSEArca: IYE) focuses 75% of the portfolio to oil and gas producers, while oil equipment, services and distribution make up the rest. IYE has gained 5.6% year-to-date. [ETF Chart of the Day: Energy Sector]

The  strong earnings from energy companies have helped boost the sector upward, and analysts are expecting the same strong reports to come out of the first quarter. Investors beware – energy is the second most volatile sector, second to the financial sector. Patterns indicate that it can be the best-performing sector or it’s the worst-performing sector in the S&P 500, reports Baiocchi. [Sector ETFs for Obama and the Fiscal Cliff]

The iShares US Oil and Gas Production ETF (NYSEArca: IEO) has a year-to-date return of 8.8%. The ETF focuses in on the production and exploration aspect of energy rather than the commodity itself. Market Vectors Oil Services ETF (NYSEArca: OIH) is up 9.4% year-to-date. [Energy ETFs Start Second Half with a Bang]

Energy Select Sector SPDR

 

OIH, IEO, XLE, IYE, Oil, ETF, Commodity ETFs, Oil and Gas Production

Tisha Guerrero contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.