The specter of a full-fledged invasion of Ukraine by Russia is roiling global equity markets, but the epicenter of those concerns is the oil market, owing to Russia’s status as one of the world’s largest crude producers.
With that in mind, some energy exchange traded funds could be hedges against the volatility created by geopolitical tensions in Eastern Europe. That group includes the First Trust Nasdaq Oil & Gas ETF (NASDAQ:FTXN).
FTXN jumped 1.27% on Wednesday, an otherwise dismal day for the broader market, extending its year-to-date gain to 15.12%. One day doesn’t guarantee a trend, but it could be a sign that FTXN might offer investors some protection should oil prices climb at the hands of geopolitical tensions.
“Russia is one of the world’s largest suppliers of key energy commodities, including oil and natural gas as well as in-demand industrial metals such as aluminum, copper, cobalt, and nickel. With U.S. lawmakers promising the ‘mother of all sanctions‘ that would be ‘crippling to [the Russian] economy’ in the event of an invasion, the markets are bracing themselves for a series of supply shocks that could trigger another round of price spikes,” reports Alex Kimani for OilPrice.com.
Even if Russia suddenly changes course and opts for diplomacy over an armed invasion of Ukraine, the case for FTXN doesn’t wane. After all, the ETF is dedicated to commodities producers and inflation remains high in the U.S., providing ballast to the commodities investment thesis.
“Other than geopolitical tensions, investors have been flocking to oil and other commodities as inflation in the U.S. continues its northerly trajectory. Economic data showed that U.S. inflation has surged to a four-decade high of 7.5%, prompting the Federal Reserve Bank of St. Louis President James Bullard to advocate for a supersized rate hike,” according to OilPrice.com.
FTXN, which is up more than 43% over the past year, is cut from a different cloth than rival, traditional equity-based energy ETFs. For example, the Nasdaq US Smart Oil & Gas Index — the fund’s underlying benchmark — isn’t cap-weighted. Rather, it focuses on other factors, including growth, value, and volatility. FTXN’s 49 components are weighted based on a score that combines those factors.
That unique methodology could position FTXN investors to capitalize on geopolitical tensions as well as domestic inflationary pressures. FTXN’s top five holdings combine for approximately 30% of the fund’s roster.
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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.