More Pain Ahead for Energy ETFs?

The energy sector, which was the outperformer for most of the year, lost all its shine in recent months on a drop in oil prices due to recession fears. Front-month Brent futures hit the lowest levels last week since February, tumbling 13.7% and posting their largest weekly drop since April 2020, while WTI lost 9.7%.

As such, the ultra-popular Energy Select Sector SPDR XLE tumbled 4.7% over the past week compared with a gain of 2% for the broad market fund SPY. First Trust Natural Gas ETF FCG, Invesco DWA Energy Momentum ETF PXI, Invesco S&P SmallCap Energy ETF PSCE, Invesco Dynamic Energy Exploration & Production ETF PXE and First Trust Nasdaq Oil & Gas ETF FTXN lost around 16% each. All these funds have a solid Zacks ETF Rank #1 (Strong Buy) or 2 (Buy) (read: Energy ETFs to Dig on Record Q2 Earnings From Exxon, Chevron).

The oil slump came amid waning demand and an easing supply crunch. The Fed’s aggressive rate hikes have sparked fears of recession, thereby resulting in lower demand. Higher interest rates will drive the U.S. dollar upward, making dollar-denominated assets more expensive for foreign investors and thus dampening the appeal for the commodity. In addition, it will make the borrowings, in particular for high-yield firms, costlier and result in less money flows into capital-intensive shale oil and gas drilling projects. This, in turn, will lead to higher bankruptcies, hitting the energy sector.

Additionally, larger builds in U.S. inventories and increasing oil supply by the OPEC leaders have eased the supply crunch. The slow recovery in China's crude imports has also pushed the oil price down. One strategist from Citigroup warned of bigger drops in oil prices when demand for gasoline falls and supply rises. “It means the market is no longer expecting tightness ahead, it's expecting things to loosen up.”

According to Bill Smead, chief investment officer at Smead Capital Management, investors should buy the oil stocks as energy prices are likely to increase. Demand will likely spring back when more movement restrictions in China are eased. Further, the United States is bracing for a busy hurricane season, when supply constraints will emerge again and push the oil price higher.  

First Trust Natural Gas ETF (FCG)

First Trust ISE-Revere Natural Gas Index Fund offers exposure to U.S. companies that derive a substantial portion of their revenues from the exploration and production of natural gas. It follows the ISE-REVERE Natural Gas Index and holds 49 stocks in its basket (read: Cooling Demand to Push Natural Gas ETFs Higher).

First Trust ISE-Revere Natural Gas Index Fund has amassed $726.7 million in its asset base while charging 60 bps in annual fees. Volume is good, with 1.3 million shares exchanged per day, on average. The product has a Zacks ETF Rank #2 with a High risk outlook.

Invesco DWA Energy Momentum ETF (PXI)

Invesco DWA Energy Momentum ETF tracks the Dorsey Wright Energy Technical Leaders Index, which is designed to identify companies that are showing relative strength (momentum). The fund has 37 stocks in its basket with AUM of $206.2 million.

Invesco DWA Energy Momentum ETF charges 60 bps in annual fees and trades in a good volume of 63,000 shares a day on average. PXI has a Zacks ETF Rank #1 with a High risk outlook.

Invesco S&P SmallCap Energy ETF (PSCE)

Invesco S&P SmallCap Energy ETF offers exposure to the companies that are principally engaged in producing, distributing or servicing energy-related products, including oil and gas exploration and production, refining, oil services and pipelines. It tracks the S&P Small Cap 600 Capped Energy Index, holding 28 stocks in its basket (read: Small-Cap Sector ETFs to Tap In Light of Q2 Earnings).

Invesco S&P SmallCap Energy ETF has accumulated $130.8 million in its asset base and charges 29 bps in annual fees. It trades in an average daily volume of 440,000 shares and has a Zacks ETF Rank #2.

Invesco Dynamic Energy Exploration & Production ETF (PXE)

Invesco Dynamic Energy Exploration & Production ETF follows the Dynamic Energy Exploration & Production Intellidex Index, which thoroughly evaluates companies involved in the exploration and production of natural resources used to produce energy based on a variety of investment merit criteria, including price momentum, earnings momentum, quality, management action and value.

Holding 31 stocks in its basket, Invesco Dynamic Energy Exploration & Production ETF has amassed $261.3 million in its asset base and charges 63 bps in annual fees. It trades in a volume of 384,000 shares and has a Zacks ETF Rank #1 with a High risk outlook.

First Trust Nasdaq Oil & Gas ETF (FTXN)

First Trust Nasdaq Oil & Gas ETF follows the Nasdaq US Smart Oil & Gas Index, which measures the performance of the most liquid oil and gas securities from the NASDAQ US Benchmark Index screened through volatility, value and growth. It is a basket of 49 stocks and has amassed $1 billion in its asset base.

First Trust Nasdaq Oil & Gas ETF trades in an average daily volume of around 291,000 shares and charges 60 bps in annual fees. FTXN has a Zacks ETF Rank #1.

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SPDR S&P 500 ETF (SPY): ETF Research Reports
 
Energy Select Sector SPDR ETF (XLE): ETF Research Reports
 
First Trust Natural Gas ETF (FCG): ETF Research Reports
 
Invesco S&P SmallCap Energy ETF (PSCE): ETF Research Reports
 
Invesco DWA Energy Momentum ETF (PXI): ETF Research Reports
 
Invesco Dynamic Energy Exploration & Production ETF (PXE): ETF Research Reports
 
First Trust NASDAQ Oil & Gas ETF (FTXN): ETF Research Reports
 
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