With oil futures trading near the highest levels since July, it is easy to understand why some investors are tempted to again embrace energy stocks and the relevant exchange funds. As one example, the SPDR S&P Oil & Gas Exploration & Production ETF (NYSEArca: XOP) is up more than 20% in just the past week, further validating the temptation to revisit energy ETFs.
Fueling the rally in the energy space, a monthly U.S. energy report argues that global oil demand could jump by the most in six years in 2016 while non-OPEC supply stalls, which suggests that the oil supply glut could be easing more quickly than expected, Reuters reports.
However, there are reasons for investors to be cautious with volatile energy ETFs. Moreover, if oil prices falls to new lows and the shale industry is unable to turn a profit, the highly leveraged industry may find it harder to repay debt obligations.
With the U.S. dollar strengthening and the Federal Reserve looking at tightening its monetary policy, the various U.S. market sectors and related exchange traded funds could behave differently in a strong USD environment.
The Trade Weighted U.S. Dollar Index has increased 15% over the past year and is at its highest level in over 10 years, writes Karen Wallace for Morningstar. Energy ETFs can prove particularly vulnerable in the face of a stronger greenback.