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.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Mr. Lydon serves as an independent trustee of certain mutual funds and ETFs that are managed by Guggenheim Investments; however, any opinions or forecasts expressed herein are solely those of Mr. Lydon and not those of Guggenheim Funds, Guggenheim Investments, Guggenheim Specialized Products, LLC or any of their affiliates. 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.

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