Small-Cap Energy ETFs Are Outperforming | ETF Trends

Smaller energy companies have been more nimble in capitalizing on the surge in crude oil prices, helping exchange traded funds that track the small-cap energy segment outperform.

For example, the VanEck Vectors Unconventional Oil & Gas ETF (FRAK) increased 105.9% and the Invesco S&P SmallCap Energy ETF (NasdaqGM: PSCE) advanced 91.4% year-to-date. Meanwhile, the Energy Select Sector SPDR Fund (NYSEArca: XLE) rose 59.5% and the JPMorgan Alerian MLP Index ETN (NYSEArca: AMJ) gained 53.8% so far this year.

After years of depressed returns and a shifting attitude toward more socially responsible investing, investors have been exiting the big oil sector, which has left smaller companies to capitalize on the rising prices, the Wall Street Journal reports.

Companies that remain in the energy space are bolstering production, but these companies are comprised of relatively smaller players that won’t be able to make seismic shifts in the supply dynamics. The trends could continue as investors shift money out of big fossil fuel names and toward more environmentally friendly companies.

“Oil-and-gas has seen the worst returns of any sector over the past five years; the returns are volatile and investors feel ESG pressures,” Wil VanLoh, who runs Quantum Energy Partners, told the WSJ. “There’s been a huge retreat in available capital.”

Meanwhile, energy prices have surged on fears of limited supplies heading into the winter months. For instance, U.S. crude oil prices are at seven-year highs of over $80 per barrel after doubling over the past year, and natural gas prices have enjoyed a similar rally.

Despite the sudden shift toward green energy, fossil fuels still account for 80% of U.S. energy consumption, so they aren’t going away any time soon. Demand for crude oil as a main energy source for transportation is even projected to increase in the years ahead. Global oil demand is projected to rise every year through 2026, hitting 104 million barrels per day, or up 4% from 2019 levels, according to the International Energy Agency.

While higher prices and limited supply have helped trigger a boom in oil and gas production in previous years, publicly held companies that are under the scrutiny of a more environmentally friendly investor market have been forced to cut back on projects but spend more money on dividends and buybacks to please what investors they have left.

“Growth in U.S. energy supply will have to come from private companies because public companies are under pressure from investors to return capital, not to spend on growing production,” Doug Swanson, managing partner at EnCap Investments LP, told the WSJ.

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