Frenzy in the energy sector has reached a fever pitch, but are exchange traded funds (ETFs) that allow investors to hedge those prices necessarily a great idea?
The summer driving season is going to kick off soon, but with the way things are going, who can afford it? Oil passed $126 a barrel today, while gas rose to more than an average of $3.67, reports John Wilen for the Associated Press.
Oil’s price spike came after concerns about Venezuelan President Hugo Chavez’s ties with rebels who are threatening to overthrow Colombia’s government. It may raise chances the the United States will impose sanctions on one of its largest oil suppliers, and Chavez might then cut off our supply.
Many investors have been looking at situations like this and wondering how they can lock in the lower prices and profit from the price hikes. ETFs that hold oil and gas futures are designed to rise in value at the same time their underlying commodities are going up in price, reports Rob Wherry for Smart Money.
Natural gas has benefited from the fear that supply and inventory issues will push crude-oil prices even higher as well, says John Spence for MarketWatch. ETFs like U.S. Natural Gas Fund (UNG),
up 50.1% year-to-date, has also served as a means for investors to hedge their
exposure to energy.
With all this good energy flowing around the markets, a new alternative energy ETF has been launched. The Claymore/Mac Global Solar Energy Index (TAN) debuted on April 15, and has lured plenty of interest. Steve Gelsi for MarketWatch says
this has been the second-fastest growing ETF from Claymore thus
far. The TAN index invests in 25 companies chosen under the MAC Global
Energy Index. The fund is up 0.2% since its launch.
The one hindrance to hedging is that the people who need the hedge most might be among the least likely to actually have the cash on hand to do it. And then there’s the matter of the tax bill if a profit is made.
You can’t forget the volatility of the energy market, either. It’s prone to wild swings in either directions, and some suspect it’s a bubble that’s ready to burst.
This feeding frenzy in energy ETFs means that the more people who buy, the more the price goes up. It’s hard to know where the speculation on rising prices ends and natural demand begins.
But if you look throughout history, whenever there’s been a major bull trend, people will inevitably say it’s a bubble. That may very well be the case with oil, too. But it could also go up another 50%-100% before that happens.
Don’t fight the trend. But have your stop loss in place if the bubble does burst.
Other funds that trade energy futures are:
