Market Overview

An Energy ETF That Responds To Rising Oil Prices

An Energy ETF That Responds To Rising Oil Prices

The United States Oil Fund (NYSE: USO) hit a 52-week high last Friday and is higher by 9.7 percent over the past month. Energy stocks and related exchange traded funds are following suit, as highlighted by a gain of almost 8 percent for the Energy Select Sector SPDR (NYSE: XLE) since the start of March.

Risk-tolerant investors looking to play an ongoing rise in crude prices via stocks or ETFs may want to consider the PowerShares S&P SmallCap Energy Portfolio (NASDAQ: PSCE), the small-cap equivalent of XLE. PSCE, which tracks the S&P SmallCap 600 Capped Energy Index, is up nearly 6 percent since the start of March. Recent data suggest smaller energy stocks are taking the lead over their large-cap counterparts.

“Thus far in April [month-to-date through April 12, 2018], the energy sector is leading all other sectors, but the S&P 500 Energy is up just 4.8 percent versus the gain of 7.4 percent in the S&P MidCap 400 Energy and 7.3 percent in the S&P SmallCap 600 Energy,” according to S&P Dow Jones Indices.

Considering All Factors

As S&P Dow Jones points out, energy is unlike other sectors in that there are no sub-industry groups, such as semiconductors within technology or regional banks with financial services. Rather, the energy equipment and services and oil and gas consumable fuels groups are considered “industry” splits. Those are the only groups represented on PSCE's roster of 30 stocks.

Historically, consumable fuels producers, such as integrated oil companies, perform better in oil market downturns.

“On the flip side, with the oil comeback, now the energy equipment and services are rebounding strong, with returns more than double the oil, gas and consumable fuels in mid- and small-cap energy,” according to S&P Dow Jones.

The $54.9-million PSCE allocates about 56.5 percent of its weight to energy equipment and services providers.

More Responsive

Over long-term holding periods such as the past three years, PSCE can be significantly more volatile than XLE and even USO. Yet there is some reward to embracing that volatility as oil prices rise. The reward is clear: smaller energy stocks are more responsive to oil price gyrations

“According to the index data from 1995, using the S&P GSCI Crude Oil index as the oil price proxy, for every 1-percent rise in the price of oil, the large-cap energy sector only gains about 37.5 basis points on average, while the mid- and small-cap energy sectors gain 61.8 and 64.1 respective basis points,” said S&P Dow Jones. “Also, the large-cap energy equipment and services gains 54.5 basis points versus the gain of 34.9 basis points from large-cap oil, gas and consumable fuels for every 1-percent rise in oil price.”

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