Not all exchange traded funds (ETFs) are right for every investor. If you can’t find an ETF that matches your needs or risk tolerance, though, it’s possible to find alternative ways to get the exposure you’re seeking.
Often, investors who want to play energy would simply look at energy shares or ETFs. But the institutional approach is to look around for the cheapest way to get this exposure. For example, explains Steven M. Sears for Barron’s, if they’re looking to buy energy, they’d check out commodities, bonds, stocks, options and even credit default swaps.
This is why, if you’re looking at an energy play, Sears says you might consider a utility sector ETF such as the Utilities Select Sector SPDR (NYSEArca: XLU) because it offers a cost-effective way to get your portfolio in place if an increase in natural gas prices comes along.
Why? Utilities are increasingly using coal and natural gas to generate power, and electricity prices are set on the basis of consumer demand as well as the supply of natural gas and coal. Therefore, Sears says, XLU is showing a higher correlation to energy prices.
The biggest risk to utility ETFs and shares is the government legislation on greenhouse gases, which could increase their costs over time. Such legislation could force utilities to purchase CO2 pollution allowances, which could cut into earnings, says The Motley Fool. (Read more about what climate change legislation means for utilities).
Utility stocks typically lag during strong bull markets as investors chase higher growth prospects, but they do not tend to decline much during a bear market, Fool notes. Be sure to approach your investments with a strategy in place, such as by using the 200 day-moving-average. (Read about trend following here).
For more stores about utilities, visit our utility category.
- iShares Dow Jones U.S. Utilities (NYSEArca: IDU): up 3.5% year-to-date
- Select Sector SPDR Utilities (NYSEArca: XLU): up 2.3% yer-to-date
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.