Russia’s decision to instigate war with neighboring Ukraine is having the predictable impact of sending oil prices higher, and if the U.S. and other countries ban imports of Russian crude, which could happen, those prices are likely to continue higher.
These scenarios are potential boons to the energy sector and equity-based exchange traded funds such as the First Trust Nasdaq Oil & Gas ETF (NASDAQ:FTXN). In fact, FTXN is one of the epicenters of energy sector enthusiasm.
FTXN, which tracks the Nasdaq US Smart Oil & Gas Index, is on fire. Here’s the fund’s tale of the tape from last week: Last Friday, FTXN rose 3.16 to a new 52-week high, pushing its weekly gain to 10.69% while extending its year-to-date rally to 31%.
While geopolitical events often move oil prices — FTXN is proving as much — there’s another benefit investors should consider: an improving outlook for energy sector earnings. In fact, energy is on the receiving end of the highest percentage of bottom-up earnings per share revisions for the current quarter. It’s one of just three sectors — real estate and technology are the others — with positive percentages for the first quarter.
“Rising oil prices are helping to drive the increase in expected earnings for the Energy sector, as the price of oil increased by 27% (to $95.72 from $75.21) from December 31 to February 28. Earnings estimates for the Energy sector and the price of oil are highly correlated,” notes John Butters, FactSet vice president and senior earnings analyst.
In what amounts to good news for FTXN investors, there is an intimate correlation between rising crude prices and energy sector earnings.
“Over the past 20 years, the correlation coefficient between the daily forward 12-month EPS estimate for the Energy sector and the daily price of oil (WTI) is 0.89 (where 1.0 is a perfect positive linear relationship). The Energy sector also recorded the largest increase of in its forward 12-month EPS estimate (+10.6%) of all 11 sectors over the first two months of the quarter,” adds Butters.
That’s highly relevant to FTXN investors because the fund’s top 10 holdings include large-cap companies with the resources to leverage soaring oil prices into better bottom-line results. Think Chevron (NYSE:CVX), Marathon Oil (NYSE:MRO), and ConocoPhillips (NYSE:COP), among others.
That trio combines for about 16.4% of FTXN’s roster. Those are three of the fund’s 49 components.
For more news, information, and strategy, visit the Nasdaq Investment Intelligence Channel.
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.