Admittedly, I had a tough time seeing oil moving any lower than $60 per barrel when the doom-n-gloomers first whistled the $30 tune. My thinking? Russia’s dependency on revenue from the exporting of oil might cause the country to move heaven and earth to prop up prices. Then again, I am not Rex Tillerson. His December 3rd conversation with CNBC gave me reason to suspect that $40 could be the definitive low point, and that strong corporations in the energy space would do well from that point forward.
And how! We can see that a variety of popular oil ETFs – exploration/production, services, integrated – share similar characteristics to the spot price in the chart above. Off of approximate 2015 low points, SPDR S&P Oil & Gas Exploration & Production (XOP), Market Vectors Oil Services (OIH) and Guggenheim S&P 500 Equal Weight Energy (RYE) have rallied 23%, 17.5% and 17.8% respectively.
From an ownership standpoint, I prefer RYE to the ones that I mentioned above or other popular index trackers. Traditional market-cap weighted ETFs allocate too much to Exxon Mobil (XOM), Chevron (CVX) and Schlumberger (SLB). In contrast, RYE incorporates non-speculative energy companies from the S&P 500, yet weights them equally to provide greater diversification across the space. Don’t get me wrong, I love quality dividend payers like XOM and CVX; I admire just how well Schlumberger has always run its business. Nevertheless, when it comes to an ETF that spans the entire sector and offers greater diversification across the names in that sector, RYE is my preference.