Energy prices, especially oil stocks—which have seen solid returns in 2021—have recently come under pressure, in part due to the new Omicron variant. Crude oil has different grades, but globally Brent crude, and in the US, WTI crude, receive the most attention.
Three key factors affect the long-term price of oil: demand, output or current supply as well as access to future supplies, which depends on oil reserves. Yet, in the short-term, the widely-followed commodity can be volatile for several reasons, including daily decisions of traders and nowadays general sentiment regarding COVID-19.
Currently, Brent and WTI are around $71 and $67, respectively. But since late October, they have lost about 20%. The price decline came when energy stocks were already volatile after President Biden’s administration pledged to release oil from strategic reserves stateside to reduce prices.
Yet, so far in the year, the Dow Jones Oil & Gas Index has returned 45.7%. By comparison, the S&P 500 index’s overall return stands at 20.8%.
Therefore, today we’ll take a closer look at oil and introduce an exchange traded fund (ETF) that could appeal to readers who believe the recent pullback could end soon.
Vanguard Energy Index Fund ETF Shares
- Current Price: $77.02
- 52-week Range: $50.59 – $84.20
- Dividend Yield: 3.73%
- Expense Ratio: 0.10% per year
Alternative energy sources have been growing in popularity. Nonetheless, in the near future, oil demand should stay robust.
According to recent metrics from the Organization of the Petroleum Exporting Countries (OPEC):
“Total primary energy demand is set to expand by a robust 28% in the period to 2045…Oil is expected to retain the largest share of the energy mix…India is expected to be the largest contributor to incremental demand.”
The Vanguard Energy Index Fund ETF Shares (NYSE:VDE), invests in leading oil and gas stocks. The fund started trading in September 2004, and net assets stand at $7.3 billion.
VDE, which has 94 holdings, tracks the Vanguard Equity Index. Over 65% of the holdings are in the top 10 shares. In terms of sub-sectors, we see integrated Oil & Gas (39.20%), Oil & Gas Exploration & Production (29.60%), Oil & Gas Storage & Transportation (11.50%) and Oil & Gas Refining & Marketing (10.00%).
Leading holdings on the roster include oil majors Exxon Mobil (NYSE:XOM), Chevron (NYSE:CVX), ConocoPhillips (NYSE:COP), leading upstream crude oil groups EOG Resources (NYSE:EOG) and Schlumberger (NYSE:SLB), and energy infrastructure name Kinder Morgan (NYSE:KMI).
VDE returned 48.5% year-to-date, and hit a multi-year high in October. Since then the fund has lost over 8%.
Moves in shares of oil companies typically reflect moves in the price of crude, which could stay volatile in the coming weeks. In addition, before the year-end, we’re unlikely to retest the October highs.
Put another way, although the recent dip in price offers an opportune entry point, investors should realize that it might take several months before a new bull leg begins. We’re likely to see more oil price swings in 2022 as well.
Bottom Line
Many market participants have somewhat of a love/hate relationship with oil companies. But a fund like VDE deserves the attention of long-term investors, who would also enjoy a current dividend yield of over 3.7%.
Meanwhile, other funds that might be of interest include:
- Energy Select Sector SPDR Fund (NYSE:XLE) - up 45.5% YTD;
- iShares Global Energy ETF (NYSE:IXC) - up 35.6% YTD;
- iShares MSCI Global Energy Producers ETF (NYSE:FILL) - up 36.9% YTD;
- SPDR S&P Oil & Gas Exploration & Production ETF (NYSE:XOP) - up 62.6% YTD;
- VanEck Vectors Oil Refiners ETF (NYSE:CRAK) - up 8.0% YTD.
There are also several funds that invest in a diverse range of commodity-linked futures. One example would be the Invesco DB Commodity Index Tracking Fund (NYSE:DBC), which invests in 14 commodities. So far in 2021, DBC has returned 32.6%. We believe this liquid commodity product deserves further research.