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ETFs for Amped Energy Appetite

Stocks in this article: USO OIL UGA XLE IEO IXC

By Kevin Grewal, Editorial Director at www.SmartStops.net

NEW YORK ( TheStreet) -- As the global population continues to expand and purchasing power in developing nations increases, the world's appetite for energy is likely to amplify - creating an opportunity for investors.

According to the Energy Information Administration, or EIA, average consumption of crude oil is expected to increase to 1.5 million barrels per day, up nearly 300,000 barrels per day from its previous forecast. This uptick in demand is primarily being driven by expected economic growth in the Asia-Pacific regions and the Middle East as well as a more optimistic domestic economic outlook.

Additionally, the EIA has stated that it expects a barrel of crude oil to average a price well north of $80/barrel, which is being supported by an increase in demand and the decision by OPEC to curtail any increases in production. These price pressures have led the EIA to forecast the average price of a gallon of gasoline in the U.S. to hover around $2.35/gallon for 2010, an increase of nearly 21% from a year earlier.

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With this in mind, there are plenty of ways investors can cash in on the energy sector. Here are a few:


  • The US Oil Fund (USO), which holds futures contracts and rolls them forward on a monthly basis. One thing to keep in mind when investing in USO is that contango and backwardation can have significant impacts on performance. USO closed at $39.55 on Tuesday and is up over 42% over the past year.
  • The iPath S&P GSCI Crude Oil Ttl Ret Idx ETN (OIL), which is an unsecured, unsubordinated debt security interest linked to the performance of the Goldman Sachs Crude Oil Return Index. OIL seeks to track futures contracts in West Texas Intermediate crude oil. OIL has gained nearly 41% over the past year and closed at $26.14 on Tuesday.
  • The United States Gasoline Fund (UGA), which seeks to replicate changes in percentage terms of the price of gasoline. UGA invests in the futures contract of unleaded gasoline and is subject to the influences of contango and backwardation, similar to that of USO. UGA closed at $37.32 on Tuesday and has added nearly 64% over the past year.
  • The Energy Select Sector SPDR (XLE), which gives exposure to major integrated oil and gas companies like Exxon Mobil (XOM) and Chevron (CVX). XLE closed at $58.06 on Tuesday and is up approximately 52% over that last year.
  • The iShares Dow Jones US Oil & Gas Exploration Index (IEO), which primarily holds companies that are focused in the exploration, production and development of oil and natural gas. Some of its top holdings include Occidental Petroleum (OXY), Apache Corporation (APA) and Devon Energy (DVN). IEO is up nearly 86% over the past year and closed at $55.48 on Tuesday.
  • The iShares S&P Global Energy (IXC), which gives global exposure to the energy sector and includes such companies as Royal Dutch Shell, BP Plc (BP) and Petroleo Brasileiro (PBR). IXC closed at $35.30 and is up nearly 50% over the last year.

Although an opportunity seems to exist in the sector, it is equally important to consider the volatility and inherent risks involved in investing in a commodity-driven sector. To help mitigate these risks, the implementation of an exit strategy that triggers price points at which an upward trend could potentially be coming to an end is of importance.

According to the latest data at www.SmartStops.net, an upward trend in the mentioned ETFs could come to an end at the following price points: USO at $38.41; OIL at $24.33; UGA at $35.06; XLE at $56.78; IEO at $53.94; and IXC at $34.41. These price points change on a daily basis as market conditions fluctuate; updated data can be found at www.SmartStops.net.

Written by Kevin Grewal in Laguna Niguel, Calif.

Kevin Grewal serves as the editorial director and research analyst at The ETF Institute, which is the only independent organization providing financial professionals with certification, education, and training pertaining to exchange-traded funds (ETFs). Additionally, he serves as the editorial director at SmartStops.net where he focuses on mitigating risks and implementing exit strategies to preserve equity. Prior to this, Grewal was an analyst at a small hedge fund where he constructed portfolios dealing with stock lending, exchange-traded funds, arbitrage mechanisms and alternative investments. He is an expert at dealing with ETFs and holds a bachelor's degree from the University of California along with a MBA from the California State University, Fullerton.

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