McCall’s Call: ETF Mideast Protection Kit

February 23, 2011

With markets spooked by chaos in oil-rich Libya, it’s time for ETF investors to review a few options.


Of all the countries in the Middle East in upheaval, one so far is alone in terms of what’s at stake: Libya and its 3 percent of global crude oil output.

Matthew D. McCallThe country produces 1.6 million barrels per day, and the Financial Times reported today that half of that output is now offline amid accounts that its president, Moammar Gadhafi, has lost control of large parts of the country and has ordered troops loyal to him to shoot protesters in the streets of its capital, Tripoli.

Not surprisingly, oil markets are now flooded with buyers.

Oil prices on the New York Mercantile Exchange briefly hit $100 a barrel today before settling at $98.10—up almost 3 percent, after rising 8 percent yesterday. Stocks meanwhile are getting battered. The Dow Jones industrial average lost more than 100 points today, after shedding 1.4 percent on Tuesday.

There’s plenty to worry about in all this, but also many ways for investors to protect themselves from the shock of higher energy prices.  And, the world of ETFs offers a broad swath of alternatives for investors grappling with all this uncertainty.

They range from futures-based or equities-based exposure to the energy sector; safe-haven choices such as gold or fixed-income funds; as well as currency ETFs. For traders and more sophisticated investors, exchange-traded products such as volatility ETNs or inverse ETFs are now on the market that are designed to give investors the chance to profitably harness the turmoil in financial markets.

Energy Plays

The single-biggest futures-based oil ETF, the United States Oil Fund (NYSEArca: USO), is up 12 percent in the past five days. Those looking at Brent oil futures, which are trading above $100 per barrel, can get exposure through the United States Brent Oil Fund (NYSEArca: BNO). The ETF is trading at its highest level since its inception in June 2010.

Refined oil products are also spiking, and investors looking to hedge portfolios with long positions in energy apart from crude can also turn to the United States Gasoline ETF (NYSEArca: UGA) and the United States Heating Oil ETF (NYSEArca: UHN). Both are both trading at levels not seen since the fourth quarter of 2008.

Apart from the stock market’s broad declines, energy-related stocks have been rallying on prospects that higher oil prices will help the bottom line. The SPDR Energy ETF (NYSEArca: XLE), a $9.5 billion fund, is hovering above 28-month highs. It has risen 14 percent so far this year.

Safe Havens

In times of geopolitical unrest, investors will search out the “safe-haven” asset classes to park their money until the situation is resolved.

The most popular area is precious metals. The SPDR Gold ETF (NYSEArca: GLD) is in the midst of a seven-day winning streak through Tuesday. GLD has risen 7 percent in the past three weeks. The ETF is within 2 percent of reaching a record.

Silver, another popular safe-haven asset, is trading at its highest level in decades, and has surged 23 percent in the last three weeks. The iShares Silver Trust (NYSEArca: SLV) is an alternative to gold, and many have been saying it’s likely to climb more than gold because it has lagged gold’s rally over the past decade.

Fixed-income securities issued by highly rated countries and corporations can also be viewed as an asset class that investors could use to protect their investments during political unrest.

The Vanguard Total Bond Market ETF (NYSEArca: BND) has bounced from a 10-month low, moving up 1.1 percent in connection with the unrest in the Middle East. Still, investors shouldn’t expect big moves from bond ETFs. In the end, conservation of capital and income are the factors behind the buying.


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