Oil ETFs Ride Price Rebound To Different Heights & Lows

September 08, 2016

Contango Eats Away At Oil ETF Returns

In any case, things are much better in 2016 on the oil front than they were a year ago, fueling most energy-related ETFs to gains this year—but not all of them.

Ironically, performance for oil futures-tracking ETFs has been lousy. For example, the $2.9 billion United States Oil Fund (USO) is down 5.6% year-to-date—a far cry from the 21% gain for oil futures themselves. The underperformance stems from the roll costs associated from contango.

The United States 12 Month Oil Fund (USL), which holds 12 different futures contracts along the futures curve to mitigate contango, is doing a bit better, with a 4.8% gain, but it's still a laggard.

YTD Returns For WTI Futures, USO, USL

Rather, the best-performing energy ETFs are in the equity space. These funds don't have to contend with contango and are often viewed as leveraged bets on the price of energy commodities.

The VanEck Vectors Coal ETF (KOL) is the top energy ETF, rising a whopping 80.2% so far this year. One of the most beaten commodities, coal has seen an uptick in 2016. Though it's too little too late for the largest U.S. coal producers—many of which fell into bankruptcy earlier this year—KOL's global portfolio of coal companies has benefited from the rise.

That said, going forward, coal faces increasing competition from natural gas both in the U.S. and abroad, and is thus considered one of the riskiest energy commodities.

MLPs Bounce Back

After KOL, some of the best-performing energy ETFs are those that hold pipeline and other energy infrastructure stocks. The Tortoise North American Pipeline Fund (TPYP) and the Alerian Energy Infrastructure ETF (ENFR) are among those, rising 37.2% and 34.5%, respectively.

TPYP and ENFR are two ETFs in the complicated MLP segment of the market. MLPs are known for their steady cash flows and juicy dividends, something that kept them resilient during the early part of the oil bust. However, once U.S. crude production began to decline last year, MLPs were crushed amid fears that those cash flows would be eroded. 

This year's rebound in oil prices has alleviated those fears, boosting TPYP, ENFR and others in the space.

In terms of holdings, both TPYP and ENFR cap their exposure to tax-advantaged MLPs at less than 25%. This contrasts to the big behemoths in the space, the Alerian MLP ETF (AMLP) and the J.P. Morgan Alerian MLP Index ETN (AMJ), which are both 100% allocated to MLPs (AMLP and AMJ are in the middle of the pack this year, with gains of 13.5% and 15.2%, respectively).

 

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