Assets Under Management AUM

Could energy ETFs act as a hedge against the Ukraine crisis?

It’s official: Russian troops are now entering two breakaway regions in eastern Ukraine, Donetsk and Luhansk. Oil prices are rising as markets are nervous over expectations of imminent and widespread sanctions from the West.

Russia is one of the world’s largest suppliers of key energy products, including petroleum and natural gas as well as in-demand industrial metals such as aluminum, copper, cobalt and nickel. U.S. lawmakers promising the “mother of all sanctions” it would be “crippling for [the Russian] economy“In the event of an invasion, markets brace for a series of supply shocks that could trigger another round of price spikes.

In addition to geopolitical tensions, investors have been flock to oil and other raw materials as US inflation continues its northward trajectory. Economic data showed that the United States inflation hit a four-decade high of 7.5%, prompting Federal Reserve Bank of St. Louis President James Bullard to argue for an outsized rate hike. As stocks fell on the day, oil is seen as a safer bet amid mounting cost pressures.

Here are five energy exchange-traded funds (ETFs) to hedge against inflation and geopolitical uncertainty.

#1. Energy Select Sector SPDR ETF

AUM: $34.7 billion

Expense ratio: 0.10%

Dividend yield (FWD): 4.1%

Cumulative returns since the beginning of the year: 22.6% With nearly $35 billion in assets under management (AUM), the Energy Select Sector SPDR ETF (NYSEARCA:XLE) is the largest fund dedicated to energy. It is also the most liquid and among the cheapest, with a spend rate of only 0.10%.

XLE tracks the price and yield performance of companies across the Energy Selection Sector Index. The index offers investors broad exposure to companies in the oil, gas and energy equipment sectors. Another key attraction: the ETF has a respectable dividend yield of 4.09% (FWD).

Related: Oil Prices Temporarily Break $99 as Russian Troops Enter Ukraine

One of its flaws, however, is that the ETF only holds 24 stocks in its portfolio, with ExxonMobil (NYSE:XOM) and Chevron Corporation.(NYSE:CVX) overweight, accounting for nearly 44% of the total portfolio value.

#2. Vanguard Energy ETF

AUM: $6.63 billion

Expense ratio: 0.10%

Dividend yield (FWD): 4.0%

Cumulative returns since the beginning of the year: 20.9%

Vanguard funds are traditionally notorious for undermining cost competition, and the Vanguard Energy ETF (NYSEARCA:VDE) has stayed true to this philosophy by offering the lowest prices in the industry. With 106 stocks – albeit with far less AUM than XLE – VDE is far better diversified than XLE, although XOM and CVX still play outsized roles with weightings of 21.3% and 16.9%, respectively.

VDE tracks the performance of the MSCI US Investable Market Index (IMI)/Energy 25/50an index comprised of stocks of large and mid-cap US energy companies.

#3. US Oil ETF, LP

AUM: $2.50 billion

Expense ratio: 0.83%

Dividend yield (FWD): N/A

Cumulative returns since the beginning of the year: 19.1%

the US Oil ETF, LP (NYSEARCA: USO) seeks to track daily percentage changes in the spot price of light sweet crude oil delivered to Cushing, Oklahoma. The USO primarily invests in futures contracts for light, sweet crude oil, other types of crude oil, diesel heating oil, gasoline, natural gas, and other petroleum-based fuels.

In April 2020, the USO gained notoriety last year after being at the center of the worst oil crash in history.

The WTI futures contract fell 310% to minus $38.45 a barrel, marking the first time a futures contract for U.S. crude prices turned negative – and made all those seemingly improbable “negative oil” forecasts suddenly appear premonitory. Negative oil prices are an absurd notion that basically means that producers would pay traders to get rid of oil. USO, the nation’s largest long-term crude oil exchange-traded fund (ETF), was to blame for the debacle as it held 25% of open volume in May’s WTI oil futures.

Fortunately, a repeat of this kind of chaos is unlikely after USO moved 20% of the WTI contracts it holds in the following months in an effort to reduce volatility.

#4. Direction Daily S&P Oil & Gas Exp. & Prod. Bull 2x Equity ETF

AUM: $874.9 million

Expense ratio: 1.14%

Dividend yield (FWD): N/A

Cumulative returns since the beginning of the year: 24.9%

the Direction Daily S&P Oil & Gas Exp. & Prod. Bull shares 2x (NYSEARCA: GUSH) is a listed index fund that was launched by Direxion Investments in May 2015.

GUSH invests in the public equity markets of the United States. The fund uses derivatives such as futures and swaps to build its portfolio and invests in growth and value stocks of companies with diverse market capitalizations. It seeks to track 2x the daily performance of the S&P Oil & Gas Exploration & Production Select Industry Index (SPSIOP).

#5. iPath Series B Bloomberg Aluminum Total Return ETN Sub-Index

AUM: $15.61M

Expense ratio: 0.45%

Dividend yield (FWD): N/A

Cumulative returns since the beginning of the year: 17.1%

the iPath Series B Bloomberg Aluminum Total Return ETN Sub-Index (NYSEARCA:JJU) is an exchange-traded note launched by Barclays Bank PLC in 2018. The rating aims to track the performance of the Bloomberg Aluminum Subindex Total Return. The index represents commodity markets and includes aluminum futures.

Exchange-traded notes (ETNs) are close cousins ​​to exchange-traded funds (ETFs), but with a few key structural differences.

ETNs differ from ETFs in that they are unsecured debt securities that track an underlying index of securities, while ETFs provide investments in a fund that holds the assets it tracks, such as stocks, bonds or gold.

A big advantage of ETNs over ETFs is that they have no tracking error and also enjoy more favorable tax treatment.

On the other hand, an ETN like JJU carries credit risk as investors could lose their money in the unlikely event that Barclays goes bankrupt, whereas ETFs have virtually no credit risk.

There is a good reason to buy an aluminum ETN like JJU.

Russia accounts for about 6% of global aluminum supply, and an escalation of tensions between Russia and Ukraine increases the likelihood of a supply shock in an already tight aluminum market.

According to United States Geological Survey, Russia produced about 3.7 million metric tons of aluminum in 2021, with global production of the metal amounting to about 68 million metric tons. Data by CIA World Factbook shows that China is the world’s largest aluminum producer, producing about 39 million metric tons in 2021, but Russia is also a major exporter of the raw material.

Aluminum prices have risen around 15% since the start of the year, prices near multi-year highs, but could still increase. Jefferies analyst Christopher LaFemini said that even if geopolitical risks in Europe ease, aluminum prices are likely to decline first before recovering as the market deficit is likely to persist.

Meanwhile, shares of one of the world’s largest aluminum producers Alcoa Corp. (NYSE:AA) have jumped 270% in the past year and 31.3% since the start of the year. The Femina has raised its AA price target to $90, the highest on the street from $75, good for 15% upside, while reiterating its buy recommendation, as on growing fears that have reduced supplies from Russia.

By Alex Kimani for Oilprice.com

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