2 Sector ETFs to Benefit from the Crude Oil Slump - ETF News And Commentary

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One of the most talked-about asset crises in the recent past has been the oil crash. Sluggish demand thanks to a soft macroeconomic backdrop in some developed regions including the Euro zone and China, booming oil production resulting in abundant supply and a strengthening dollar played foul.


Oil prices continued their ascent in the first half of the year courtesy of a prolonged and severe winter in the Northern Hemisphere, and geopolitical tensions from Russia to Iraq that disturbed supplies. As a result, the commodity touched the triple-digit mark then. However, this was a short-term respite.


As soon as the harsh winter passed, the geo-political crisis took a backseat and the U.S. economy started delivering stellar economic numbers, oil bucked its trend. Solid U.S. economic growth for the last two quarters (Q2 and Q3) took the greenback to multi-year highs against a basket of currencies. This in turn weighed on commodity investing (read:
Play an Oil Price Drop with These Inverse ETFs
).


On the other hand, OPEC slashed the demand outlook for oil by reducing its estimates through 2035 barring 2015. The group indicated that the demand could be as poor as the 14-year low in 2017. Deflationary worries in the Euro zone and the still sluggish China and Japan seem to be the main culprits.


This scenario spurred oil-rich nations like Saudi Arabia and Iraq to involve themselves in a ‘price war'. Just what Saudi Arabia – the top oil exporter in the world – did few days ago, Iraq did on November 10 by offering oil to the U.S. at discounted prices. Notably, the U.S. itself boasts a huge oil surplus thanks to the shale-oil boom.


The
WTI crude
traded below $80 per barrel – a five-year low – in early November. Brent crude oil too hovered around to $82 in early November. Year to date, Crude oil ETFs like
United States Oil Fund (USO)
and
DB Oil Fund (
DBO)
have shed about 15% while Brent oil ETF
United States Brent Oil Fund (BNO)
was down about 26%.


While the oil rout posed a threat to a number of asset classes and sector ETFs, there are two sector ETFs – highlighted below – which could emerge as winners if oil continues to drop.


Transportation — iShares Dow Jones Transportation Average Fund (
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IYT)

Energy cost is the major cost for transportation companies. Airlines, shipment and rail companies need to use oil to produce energy and run their businesses. For example, the profit outlook of airline stocks depends largely on fuel prices, the major variable component in the industry. As a result, a drop in oil prices can boost margins of the transportation stocks and the related ETFs. Also, stepped-up activity thanks to a steadily improving U.S. economy favors this ETF.


This fund targets the transportation corner of the broad U.S. equity market by tracking the Dow Jones Transportation Average Index. In total, the product holds 21 securities with the largest allocation going to FedEx
FDX
, Kansas City Southern
KSU
and Union Pacific
UNP
. The three firms combine to make up for more than 25% share (read:
ETFs and Stocks to Buy in November for Sweet Returns
).


From a sector perspective, railroads take the top spot with one-fourth share, while delivery service (22.7%) and trucking (18.1%) round off to the top three. The fund has amassed about $1.8 billion in AUM while sees a good trading volume of more than 450,000 shares a day. It charges 43 bps in annual fees and has gained about 24% so far in the year (read:
Transport ETFs Drive Up on Robust Q3 Earnings
).


IYT has a Zacks ETF Rank #1 (Strong Buy) with a Medium risk outlook.


Consumer Discretionary – Consumer Discretionary AlphaDEX Fund (FXD)

Consumer spending is largely related to energy prices. Higher energy bills related to cars and other home appliances normally restrict consumer spending and squeeze their discretionary purchases. Thus, with a substantial plunge in oil prices, consumers will be able to pour their money into discretionary items, especially prior to the holiday season – a key selling period.


This is one of the more popular and liquid ETFs in the consumer space with AUM of $1.16 billion and an expense ratio of 0.70%. The fund follows an AlphaDEX methodology and ranks stocks in the space by various growth and value factors, eliminating the bottom ranked 25% of the stocks.


This approach results in a basket of 139 stocks that are invested in various market spectrums. Each security holds not more than 1.48% of assets. Specialty Retail is the top sector with about one-fourth allocation, followed by Media (13.8%) and Household Durables (11.2%).


The ETF has added more than 10% in the past four weeks. FXD has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook (read:
Is It Finally Time to Buy Retail ETFs?
).


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.
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US-OIL FUND LP USO: ETF Research Reports

US BRENT OIL FD BNO: ETF Research Reports

PWRSH-DB OIL FD DBO: ETF Research Reports

ISHARS-TRAN AVG IYT: ETF Research Reports

FT-CONSUMR DIS FXD: ETF Research Reports

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