The energy sector was the best-performing group in the S&P 500 last year as many previously downtrodden stocks and exchange traded funds rallied. Oil was one of 2016’s best-performing commodities, boosting optimism that that theme will carry over into this year and help the energy sector to another bullish showing.
As crude oil prices rebound, shale hydraulic fracturing companies could increase spending on exploration and production next year, supporting further gains in energy services-related exchange traded funds. That theme could be good news for ETFs such as the First Trust Natural Gas ETF (NYSEArca: FCG).
FCG, which is comprised of natural gas exploration and production companies, rose 19.6% last year after getting drubbed in the previous two years.
Oil prices are rebounding after Saudi Arabia and its allies in the Organization of Petroleum Exporting Countries, along with other non-OPEC producers, pledged to cut output to end the global glut that depressed crude prices for two years.
“While many will focus on the oil explorers and producers to capture profits, there are many companies in that group that have so much debt that even higher oil prices won’t save them. I like the companies with better balance sheets and a mix of oil and gas production. Many such stocks can be found in FCG,” reports MarketWatch.
As its name implies, FCG has significant natural gas exposure, though many of its holdings increased oil output when crude prices were high. Still, natural gas prices are part of the equation with FCG.
Many observers, though, expect that higher demand for natural gas to heat homes and fire power plants, along with lower production, could steadily trim away at the large natural gas inventories even in a normal winter season.
“FCG focuses on companies with significant natural-gas production. While several components are pure play natural-gas producers, most also have significant oil production, such as Devon Energy Corp (NYSE: DVN),” adds MarketWatch.
FCG tracks the equal-weight ISE-Revere Natural Gas Index. The $245.6 million ETF holds 38 stocks. The median market value of FCG’s holdings is nearly $8 billion.
For more information on the crude oil market, visit our oil category.