Investors Flood Oil ETFs Looking For Bottom

December 19, 2014

The hunt for value seems to be on in the energy ETF segment. Investors poured more than $2 billion into energy-linked ETFs in the past week alone, more than doubling the assets in funds such as United States Oil Fund (USO | A-70), and adding nearly $740 million to the Energy Select SPDR (XLE | A-96) in just five days.

Energy is the most-beaten-down sector in the S&P 500 this year, dropping more than 11 percent year-to-date, when the best-performing sector, health care, rose some 27 percent in the same period. The broad benchmark itself is now up more than 13 percent year-to-date.

Behind the energy sector's dismal performance is weakness in oil. The price tag on a barrel of WTI crude today is about 44 percent lower than it was at the beginning of the year as abundant supplies drown out shrinking aggregate demand globally.

Bottom Bounce?

But in the past couple of days, oil prices managed to bounce slightly after hitting a fresh five-year low earlier in the week. It seems that was enough to bring some bargain hunters back into the fray.

"Buyers of energy funds are trying to get in ahead of the bottom in oil prices," Sumit Roy, commodities analyst at HardAssetsInvestor, told "By far the worst-performing sector in the S&P 500, energy is now seen as a bargain by some."

Sam Stovall, U.S. equity strategist for S&P Capital IQ, says the energy sector is looking downright "compelling" from a relative strength perspective at these levels. ETF asset flows suggest investors are taking notice.

"There have been six times in the past quarter-century that the S&P 500 energy index traded this low, or lower," Stovall said in a recent webcast. "Over the subsequent 24 months, however, the energy index was positive six of six times, and beat the S&P 500 five of six times. It also outpaced the broad stock market by an average 16 percentage points."

Value Opportunity Brightens

Past performance is no indication of future outcomes, as Stovall noted, but the numbers do cast a positive light on the prospects for energy stocks going forward.

USO is largely considered the closest ETF proxy to oil prices, and a very liquid one at that. The fund invests only in near-month Nymex futures contracts on WTI crude oil, and trades more than $350 million, on average, every day, making it a popular choice with investors who want to tap in to oil through energy-futures-based ETFs.

XLE, meanwhile, is an equity energy fund, and owns some 44 stocks as it tracks a market-cap-weighted index of U.S. energy companies in the S&P 500. The fund has almost $11 billion in assets.

As a segment, energy-linked ETFs had more than $48.6 billion in total assets as of Dec. 18, up 4.3 percent from a week earlier.

Top 5 Commodity ETF Creations Dec. 12-18, 2014

Ticker Fund Net Flows ($,mm) AUM
($, mm)
AUM % Change
XLE Energy Select SPDR 738.14 11,085.38 7.13%
USO United States Oil 392.54 1,162.14 51.01%
DJP iPath Dow Jones-UBS Commodity Total Return ETN 354.48 1,755.75 25.30%
OIH Market Vectors Oil Services 198.62 1,091.21 22.25%
VDE Vanguard Energy 171.97 3,102.97 5.87%

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