Oil Price Bear Market May be Crude Awakening for These ETFs

Oil Price Bear Market May be Crude Awakening for These ETFs

What ETF investors can learn from oil’s misery.

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Reviewed by: Kent Thune
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Edited by: Ron Day

As market watchers speculate and anticipate regarding a spot bitcoin ETF, perhaps ETF investors should check out the recent frenetic price action of another asset class. It has worked on a publicly traded spot market for decades. That market is oil prices, and its message of the moment is “be careful what you wish for.” 

The concerns here are many: the war in Ukraine, potential expansion of the Israel-Hamas war to include Iran, the coming winter, OPEC-member sound bites, and the draining of the United States’ Strategic Petroleum Reserve. No surprise, then, that oil prices have made for an adventure this year. And last year. And the year before. 

In fact, discussing volatile oil prices has joined a list of other über-certainties: the earth is round, water is wet and grass is green. But with so many oil-related ETFs, how can financial advisors and investors capitalize on the next potential move of consequence? 

In the latest chapter of Follow the Bouncing Oil Price, let’s turn to our hero (term used loosely), the spot price of West Texas Intermediate Crude Oil. As of Dec. 4, it sits in the $72 a barrel area. The average price throughout 2023 has been about $78, but oil has fluctuated between $67 and $91 during the current calendar year, according to the St. Louis Fed.  

So, with the current price sitting at more than 20% below its September peak level, oil fits the classic Wall Street definition of a bear market. 

Why ETF Investors Should Care About Oil Prices  

Beyond human consumption needs and environmental battles over fossil fuel (as witnessed at this month’s COP28 conference), oil is an area investors are essentially required to follow, given its impact on so many parts of the investing landscape. Oil prices are a key component of the total Consumer Price Index, which was reported Tuesday at 3.1% for the last 12 months.  

Energy stocks are part of the S&P 500, and currently occupy 4% of the SPDR S&P 500 ETF Trust (SPY) portfolio. It has reached as high as 15% or more twice since 1990. That was around 1991 in the wake of the outbreak of the Persian Gulf war, and again in 2008 during the heart of the global financial crisis. 

Oil ETFs to Consider for 2024 Contrarian Play

If that last paragraph makes you think, it should. Investors head into 2024 with a range of concerns, which include the risk of two wars expanding that could impact oil-producing nations outside the United States. And the economy is threatening a recession or is possibly in one, based on declines in the fortunes of some economic sectors. So, this is an intriguing time to consider a contrarian approach in using ETFs to own oil-related investments.

Among a wide range of choices for investors is the SPDR S&P Oil & Gas Exploration and Production ETF (XOP), a $3.4 billion fund that focuses on the drilling and extraction part of the oil process. And the Energy Select Sector SPDR Fund (XLE) is a giant at $36 billion. It invests in all energy stocks within the S&P 500 Index: It’s currently a highly concentrated ETF as the two largest holdings account for nearly 40% of its assets. 

And, for those considering a more direct tracker of the oil price itself, the $115 million ProShares K-1 Free Crude Oil Strategy ETF (OILK) distinguishes itself from its peers because it is structured as an open-end ETF instead of a commodities pool. As a result, investors avoid the potential hassle of receiving a K-1 partnership tax form. 

A spot bitcoin ETF, if it occurs, should attract a lot of attention – and experience a lot of volatility. For long-time investors in the oil patch, the timely expression – or greeting – might well be “welcome to our world.” 

Rob Isbitts was an investment advisor for 27 years before selling his practice to focus on ETF research and education. He is based in Weston, Florida. Contact him at  [email protected] and follow him on LinkedIn.