Energy & oil ETFs in focus as OPEC reaches compromise with UAE

Cinthia Murphy, Managing Editor of ETF.com, joins Yahoo Finance to discuss the phenomenal year for energy ETFs and where investors are taking out money in the ETF space.

Video transcript

ALEXIS CHRISTOFOROUS: All right. Time now for our ETF report, brought to you by Invesco, QQQ. Let's say hello to Cinthia Murphy, managing editor of ETF.com. Cinthia, always good to see you. I want to stick with this energy theme we were just talking about with Emily. Because I know that energy ETFs have actually been some of the standout performers lately. Tell us what some of them are and what's leading that drive.

CINTHIA MURPHY: Hey, Alexis. Yeah, it's been a phenomenal year for energy ETFs across the board. Oil, broad energy, energy equities-- you name it-- they're all in the top performing charts year to date. And it really has been this story about, you know, one of the big re-opening trades. Because last year, consumption was down dramatically. Investment in energy production was down. Supply was down. And so there's been so much room to the upside. And we saw oil hit seven-year highs before today and the small correction. And energy ETFs across the board have gained dramatically.

But there's more to it, too. Because one of the things that has really been supporting energy stocks this year is just the turn to value, the cyclicals play that we've seen happen in 2021. And if you remember energy, I mean it's one of the most beaten down sectors in the S&P 500. I mean, back in 2008, energy was about 12% of the S&P 500. And coming into this year, it was under 2%. So it's a segment that really was so battered that when a favor for value stocks came into play, energy stood front and center as the opportunity play. And so we saw a lot of money go into the space and the performance shows.

ALEXIS CHRISTOFOROUS: What about outside of energy? What are some other trends you're seeing? Or you know what? Let's reverse this for a minute and talk about maybe where people are taking money out of in the ETF space right now. Perhaps they were in love with a certain sector. And they're falling out of love with it right now.

CINTHIA MURPHY: Yeah, I think right now, I mean, we saw a lot of these-- the values cyclical play really looked to put some kind of temporary top mid-June. So for the last four weeks or so, we've seen that testing out of the waters, if you will. People are trying to figure out whether they stick with the energy, whether they stick with the financials and your cyclical stocks or whether they resume their appetite for growth stocks, for technology, you know, the plays that really worked out last year, as growth takes over value. And we seem to be in that transition phase of testing the waters.

What's been kind of interesting, if you just look at energy specifically, if you look last year, the play really was clean energy, for example. I mean, those funds, like TAN, ICLN, I mean triple digit gains, massive flows. And it was really the story in energy. Come 2021, it's all about oil, crude, gasoline, natural gas, and clean energy completely out of favor. They're underperforming. They're some of the worst performing ETFs this year.

So it's been a kind of a fascinating story because clean energy is, in a way, the growth story within energy, where all the other stuff is the more well-established part of the energy story. And so we see this dynamic even within a single sector of this value versus growth play. And it seems like it's a little bit of a transition.

I think as we look forward, it's all going to come down to inflation and what inflation triggers. So if inflation picks up and we see higher rates, chances are a segment like energy and your value stocks are going to hurt because it will slow down the economy. And these plays that have been really favored in 2021 will lose their steam. Now if we get inflation and the Fed takes no action, so the economy goes on growing undeterred, then it should be really good for energy and value stocks to continue. So it would be really interesting to see what happens next.

ALEXIS CHRISTOFOROUS: So Cinthia, how can investors start to think about accessing this energy story, as you call it, if they want to get in short term, but also, what about those investors who are looking at the energy sector longer term?

CINTHIA MURPHY: Yeah, at the end of the day, the choice usually comes to, do you want to invest as closely as possible in the spot price of oil, or do you want to go the equity route? For oil, you're going to be looking for a futures base ETF, something like QSO. And in those, the risk really is the long term risk because you've got to take into account the cost of moving from one expiring futures contract to the next. You have to watch the curve closely. And they can be trickier, more high maintenance plays to excess energy and more popular ways through the equity.

So the stocks of your oil explorers or, you know, refineries, XLE, for example, the sector SPDR for energy, your more broader exposure, in that play you have a lot of the equity risk, obviously, but it's the part of the market that you can correlate more closely to the stock market in general. And if you think stocks are in a good position to keep rallying, then the energy stocks should benefit as well.

ALEXIS CHRISTOFOROUS: All right, Cinthia Murphy, managing editor of ETF.com, thanks for being with us.