Crude oil prices continue to rise, breaking above $70 this week, their highest point since 2014. That’s unwelcome news if you drive just about any car other than a Tesla (TSLA). But it’s great news for oil ETFs.
As we so often say here at Cabot Wealth Network, we’re stock pickers. We prefer to recommend individual stocks—growth stocks, value stocks, small cap stocks, etc. However, there are occasions when we recommend exchange-traded funds (ETFs). One of those occasions is when there’s a red-hot sector and you want to take full advantage of its momentum. Rather than pick one or two stocks, it can make sense to buy an ETF that tracks a whole basket of stocks in that sector.
That’s why oil ETFs are starting to look appealing again after dipping in February and March. Oil prices are now well above their 50-day moving average ($65). Until they drop back below that average, oil is a good momentum play; and the most efficient way to play it is through an oil ETF.
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There are a number of oil ETFs that have been making strong moves amid the nine-month recovery in crude oil. Here are three that stand out:
Oil ETFs to Buy: iShares U.S. Oil & Gas Exploration & Production ETF (IEO)
As the name suggests, this ETF holds oil and gas companies specifically focused on exploration and production. It counts ConocoPhillips (COP), Devon Energy (DVN) and EOG Resources (EOG) among its 10 largest holdings (out of 100). IEO is up 41% since last August, and after dipping below 60 during the February and March market correction is suddenly at fresh 52-week highs above 72. Having traded above its 50-day moving average for a solid month, IEO has plenty of momentum with very few roadblocks in sight as long as oil prices stay high.
Oil ETFs to Buy: United States Oil Fund LP (USO)
USO is the best pure-play fund that tracks crude oil prices; it’s the largest, most liquid of futures-backed oil ETFs, with 23 million shares exchanging hands daily and roughly $2 billion in assets.
The USO is up 50% since August 30 and 17% this year – riding the coattails of the big run-up in oil prices. It’s currently at new 52-week highs above 14.
In fact, over the past five years USO has had a 0.96 correlation (1.0 is the highest) with crude. That’s a good thing now that oil prices are surging again.
Oil ETFs to Buy: PowerShares DB Oil Fund (DBO)
This one’s a bit more niche, but it’s based on the value of crude oil futures contracts, which is where the DBO invests 100% of its assets. Lately, that strategy has been working: the DBO is up 47% in the last year and 19% thus far in 2018. Aside from a couple of brief dips in February and March, the fund has traded above its 50-day moving average since its 10-month run began.
Bottom line: The longer energy remains a popular rebound play on Wall Street, the better the chances these three oil ETFs will extend their recent rises.
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*This post has been updated from the original version, published in 2016.