A Checkup on Energy ETFs

When the price of light, sweet crude hit record prices just north of $135 a barrel on May 21, the surge highlighted what has been a remarkable run for commodities -- and, naturally, commodity ETFs.

The United States Oil Fund(USO Quote) is now up a staggering 113.8% vs. a year ago. Natural gas has also heated up in recent months as the United States Natural Gas Fund (UNG Quote) has been the top performing ETF so far in 2008. It is up 45.4% year to date.

Other surging commodity-based ETFs include the SPDR S&P Oil & Gas Exploration & Production ETF (XOP Quote), the iShares Dow Jones U.S. Oil & Gas Exploration & Production Index Fund (IEO Quote), the SPDR S&P Oil & Gas Equipment & Services ETF (XES Quote) and the iShares Dow Jones U.S. Oil Equipment & Services Index Fund (IEZ Quote).

"Energy has been one of the few shining stars this year," said Ric Edelman, founder of Edelman Financial. For individual investors still looking to get into energy stocks, Edelman favors the use of ETFs. "We have been using ETFs extensively," he said. "They offer an excellent way to obtain exposure to a diverse range of sectors and at a very low cost."

Producing Profits

This year, these exploration and production ETFs have seen respective increases of 22.4% and 20.1%. Top holdings in these funds include names such as Exxon Mobil (XOM Quote), Chevron (CVX Quote), Occidental Petroleum (OXY Quote) and Devon Energy (DVN Quote). These companies have benefited from strong pricing as well as international supply constraints.

"The energy bull market is sustainable," says Ben Halliburton, founder and chief investment officer of Tradition Capital Management. "Global supply has been slow to increase."

Although U.S. consumers have been feeling the pinch of gasoline prices at the pump in recent weeks, the increases might just be bringing prices in line with other consumer purchases.