ETFs will gain and lose from higher oil prices
OIt rose above $90 a barrel for the first time since 2014 due to supply disruptions and unprecedented demand. Geopolitical tensions between Russia and Ukraine and in the Middle East as well as freezing weather have heightened concerns about limited energy supplies amid growing demand.
The energy market supply remains tight, with the Organization of the Petroleum Exporting Countries (OPEC) and its allies, known as OPEC+, sticking to their planned production increase of 400,000 barrels per day in February rather than increasing it further. Growing concerns over the Omicron variant and rising jet fuel consumption are driving demand. Rising COVID-19 vaccination rates, easing pandemic-related restrictions and a growing economy should continue to support energy demand. The combination of factors should continue to push up oil prices and therefore the energy sector.
Added to this strong momentum is the state of backwardation in the oil futures market, where future-dated contracts are cheaper than short-term contracts. This signals that the oil market is tightening and demand is robust, paving the way for a recovery in oil. This trend should persist, at least in the short term, acting as the main catalyst for the commodity (read: Oil in decline: 7 ETFs that topped the rankings last week).
Additionally, a slew of Wall Street banks and oil executives are predicting a return to $100 oil.
The rise in the price of oil: a boon or a curse?
Rising oil prices are a boon for energy stocks, especially producers and explorers, who derive most of their income from the sale of the crude they extract. Indeed, the cost of producing or extracting oil remains low, with companies seeking to secure supply contracts at higher prices. The gap between the cost of production and the selling price keeps growing when the price of oil spikes, resulting in big profit margins and thus driving up a company’s stock price. Oil-producing nations also get a boost.
While almost every corner of the energy segment shines, oil refiners could be affected. Indeed, players in this industry use oil as an input for the processing of refined petroleum products. As a result, higher oil prices squeeze refiner margins, leading to low stock prices. In addition, rising oil prices are driving up the prices of gasoline and jet aircraft. The resulting inflationary pressure will drive up product prices, leading to a reduction in consumer spending, which accounts for more than two-thirds of US economic activity. The discretionary and retail sectors will therefore bear the brunt.
Apart from that, higher oil price is a major threat for oil consuming countries like India, Turkey and South Africa. After all, rising oil prices limit tax revenue or GDP growth opportunities in major oil-importing countries. Indeed, imports become more expensive and exports have less value. This will lead to a deterioration in the balance of payments, a drop in production and an increase in inflation and the unemployment rate in these countries, thus thwarting overall economic growth (read: 3 oil ETFs to ride the crude rally).
Given this, we have highlighted the ETFs that should benefit/lose from the rise in the price of oil:
ETFs to win
VanEck Oil Services ETF OIH
The VanEck Oil Services ETF tracks the MVIS US Listed Oil Services 25 Index, which provides exposure to companies involved in oil services to the upstream oil sector, including oil equipment, oil services or oil drilling. He has 25 stocks in his basket with a double-digit allocation each in the top two companies (read: The Best Performing Stocks in January’s Top ETFs).
With an AUM of $2.7 billion, the VanEck Vectors Oil Services ETF charges 35 basis points in annual fees and trades an average daily volume of 937,000 shares. The product has a Zacks ETF Rank #3 (Hold) with a high risk outlook.
SPDR S&P Oil & Gas Exploration & Production ETF XOP
The SPDR S&P Oil & Gas Exploration & Production ETF provides exposure to 59 oil and gas exploration and production companies by tracking the S&P Oil & Gas Exploration & Production Select Industry Index. It is widely distributed among the components, each accounting for less than 3% share.
The SPDR S&P Oil & Gas Exploration & Production ETF has accumulated $4.4 billion in its base and trades an average daily volume of 7.4 million shares. The ETF charges 35 basis points in fees per year and has a Zacks ETF No. 3 rating with a high risk outlook.
VanEck Russia RSX ETF
The VanEck Russia ETF product provides exposure to 29 listed companies that are incorporated in Russia or abroad but have at least 50% of their income/assets tied to Russia. It tracks the MVIS Russia Index, charging investors 61 basis points in annual fees.
VanEck Russia ETF is popular and liquid with an AUM of $1.3 billion and trades in an average daily volume of 7.2 million shares. It has a Zacks ETF #3 rating with a high-risk outlook.
ETFs to lose
JETS US Global Jets ETFs
The US Global Jets ETF provides pure exposure to the global airline industry, including airline operators and manufacturers around the world, by tracking the US Global Jets Index. The product holds 51 titles.
US Global Jets ETF has gathered $3.6 million in its asset base while charging investors 60 basis points in annual fees. It trades in an average daily volume of 12.8 million shares and has a Zacks ETF Rank #2 (Buy) with a high risk outlook (read: Take advantage of rising oil prices with these leveraged ETFs).
SPDR S&P Retail ETF XRT
The SPDR S&P Retail ETF tracks the S&P Retail Select Industry Index, which provides exposure to large, mid and small capitalization retail stocks. He has 109 well-diversified stocks in his basket. The SPDR S&P Retail ETF is well spread across various sectors with a double-digit allocation to apparel retail, internet retail and direct marketing, automotive retail and specialty stores.
SPDR S&P Retail ETF is the largest and most popular retail ETF with an AUM of $382.4 million and an average trading volume of 4.5 million shares. It charges 35 basis points in annual fees and has a Zacks ETF Rank #1 (Strong Buy).
iShares India 50 ETF INDY
iShares India 50 ETF provides exposure to the largest Indian stocks by tracking the Nifty 50 index. It holds 51 stocks in its basket with none representing more than 10.5% of assets. iShares India 50 ETF holds key holdings in financial services, information technology and energy.
iShares India 50 ETF has managed assets worth $692.6 million and is a high-cost pick in the space, charging 90 basis points in annual fees. INDY trades an average daily volume of 67,000 shares and has a Zacks ETF Rank #3 with a medium risk outlook.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.