A Closer Look at Investing in Energy ETFs
Oil is always a fickle trade.
Throughout 2017, oil prices have rallied and stumbled more times than most of us care to remember thanks to global supply and demand issues. In fact, for the last two years, oil was either challenging its highs of $54, or diving as low as $42.
All thanks to supply-demand imbalances, and hope.
In September 2017 for example, the bulls began to argue for stronger than expected oil demand growth, as well as a reduction in global supply, calling for $100 oil by 2018.
Other analysts began calling for $80.
It’s part of the reason that oil prices ran from a September 2017 low of $46 to nearly $53.
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As a result, even Exxon Mobil (XOM) ran from $76 to $82.50. Chevron (CVX) ran from $107 to $118. To make any real money from those trades, let’s say I wanted to own 100 shares of CVX and XOM. It’d cost me $18,300 altogether. Unfortunately, not many of us have that sitting around, as we get excited about the upside opportunity for oil.
Instead, I could gain exposure to the same opportunity by buying the Pro Shares Ultra Bloomberg Crude Oil ETF (UCO) at $14.50 a share, and do quite well on its run o $18.50. With this trade, I would have exposure to the oil market at less cost.
Or, I could have bought the Power Shares DB Oil Fund (DBO) at a low of $7.50 in July 2017, and did quite well as it ran to $9 a share. With this trade, I would have exposure to oil futures, as well at a much lower cost than that of XOM or CVX.
The beauty of an ETF is that I can also gain exposure to the bearish side of oil, too.
For example, if I believe that oil prices are stretched, and ready to pull back again, I can buy an ETF that runs higher, as oil pulls back. For example, the Pro Shares Ultra Short Bloomberg Crude Oil (SCO) trade has a history of running higher each time crude prices drop. For example, when crude fell from $50 to $46 in August 2017, the SCO ran from $36 to $42.
Or let’s say I wanted exposure to the electric vehicle (EV) market.
This is one of the most explosive markets at the moment. Total S.A. for example believes electric cars could make up to 35% to 40% on global sales by 2030. OPEC just quintupled its EV forecast to 266 million from 46 million. It’s big.
And for most of these cars to run, they require a lithium-ion battery pack.
It’s why lithium prices have exploded in recent months. While we could always buy a stock like Sociedar Quimica y Minera de Chile S.A. (SQM), a low cost lithium producer, it would cost us $5,940 if we wanted to own 100 shares.
Instead, I could gain exposure to that stock, as well as 27 other big-named lithium stocks, such as FMC Corporation (FMC), Tesla Motors (TSLA), and Albemarle (ALB) at a cost of just $39 a share, or $3,900 for 100 shares with the Global X Lithium ETF (LIT). I’d rather have exposure to 27 stocks than just one at that cost.
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