Oil prices have been getting widespread attention in recent days. Hopes around increased COVID-19 vaccine rollout and a full reopening of economies worldwide have contributed to oil’s robust winning streak in the past two weeks.
Since the start of the year, the Dow Jones Oil & Gas Index has increased by about 17%. However, the index is still down more than 16% in the past 12 months.
Over the medium to long run, oil prices are determined mainly by demand requirements and the available supply capacity. But, in the short run, the commodity can be choppy for a number of reasons, including daily moves by short-term traders.
Most readers are familiar that crude oil comes in different grades. As we write, the global benchmark Brent crude is shy of $61. Its price is not much different than where it was a year ago.
Meanwhile, the U.S. benchmark, West Texas Intermediate, stands at $58. Similarly, WTI is also trading around last year's levels.
Put another way, if we had not paid attention to the oil market over the past year, we would not necessarily have known oil had been on a wild ride in the last 12 months. By April 2020, as the pandemic became a part of the daily reality, crude oil had dropped to around the $20 level, taking shares of oil majors and other energy companies with it.
But after a tumultuous 2020, the new year has seen oil win back investor confidence. Therefore, today's article introduces an exchange-traded fund (ETFs) that might appeal to readers who believe the rally in oil has legs and that prices might hold firm in the coming months to reach a new 52-week high.
Vanguard Energy Index Fund ETF Shares
Current Price: $61.20
52-Week Range: $30.03 - $74.18
Dividend Yield: 3.98%
Expense Ratio: 0.10%
The Vanguard Energy Index Fund ETF (NYSE:VDE) provides exposure to businesses that focus on the exploration and production of energy products, including oil, natural gas and coal.
VDE, which has 103 holdings, tracks the Spliced US IMI Energy 25/50 Index. Since its inception in September 2004, its net assets have grown to $4.0 billion.
Over 67% of the holdings are in the top 10 shares. As far as industries are concerned, funds are distributed among Integrated Oil & Gas (42.7%), Oil & Gas Exploration & Production (22.4%), Oil & Gas Storage & Transportation (12.10%) and others.
Oil major Exxon Mobil (NYSE:XOM); Chevron (NYSE:CVX), which focuses on upstream and downstream operations; exploration and production giant ConocoPhillips (NYSE:COP); energy manufacturing and logistics company Phillips 66 (NYSE:PSX); oil and gas explorer and producer EOG Resources (NYSE:EOG); and energy infrastructure group Kinder Morgan (NYSE:KMI) lead the roster.
VDE is up more than 19% year-to-date (YTD). However, it is still down almost 14% over the past year. Trailing P/E and P/B ratios are 43.1 and 1.2, respectively. Those investors who believe that in 2021 oil supply will no longer outweigh demand might consider investing in the ETF, especially if there is a decline below $40.
Bottom Line
We believe most investors have somewhat of a love-and-hate relationship with energy companies. Given the recent run-up in the price of the commodity, short-term profit-taking is likely. We'd use such a potential decline in price to add an energy ETF into a long-term portfolio. Many of the oil majors, as well as other businesses in the sector, have long histories. As a result, they are likely to emerge from the pandemic as robust companies, creating value for shareholders.
Meanwhile, other funds that might be of interest include:
- Energy Select Sector SPDR® Fund (NYSE:XLE) - up 17.9% YTD;
- iShares Global Energy ETF (NYSE:IXC) - up 11.8% YTD;
- iShares MSCI Global Energy Producers ETF (NYSE:FILL) - up 10.1% YTD;
- SPDR® S&P Oil & Gas Exploration & Production ETF (NYSE:XOP) - up 27.9% YTD;
- VanEck Vectors Oil Refiners ETF (NYSE:CRAK) - up 8.4% YTD.