The energy sector consists of companies involved in the exploration, production or management of energy resources such as oil and gas. Energy has long been a popular destination for all types of investors. Until several years ago, soaring oil and natural-gas prices made any energy bet pay off. Then came the crash of 2008 with a range of issues buffeting stock prices which had a knock-on effect on all asset classes, making it difficult to know where to put your money.
The Energy Sector
Recently, investment managers are being bullish again on investing in the energy sector, seeing good opportunities for gains. The United States’ desire to be increasingly independent of foreign oil is a factor and has incidentally, just affirmed its place as the world’s largest producer of oil. As a result the competitive landscape will need to adapt, and the continued turmoil in the Middle East and abroad will also have an effect. These structural forces will drive activity and supply chains will be modified as will activity levels and investment activity. There will be winners and losers.
If you look to the oil and gas producers as well as possible merger activity, which in turn could drive up stock prices, this may give you some indication where making an investment could be worthwhile.
There are various different strategies for investing in energy, each offering unique risk/return profiles. Here are some of the most popular ones:
1. “Plain Vanilla” Energy ETF’s
The traditional form of exposure to a broad spectrum of energy sector stocks is via an ETF (Exchange Traded Funds) and is still the most popular. Billions of dollars are invested in ETFs which offer exposure to “Big Oil” stocks such as Exxon, Chevron, and others.
2. Small Cap Energy ETFs
For investors looking to target smaller companies in the domestic energy sector, these products offer a way to tap into “little oil.” You won’t find the Exxons or BPs in this ETF. It will generally consist of younger companies that may exhibit more volatility in certain environments and thus are inherently more risky but offer the potential of greater rewards.
3. Emerging Market Energy ETFs
Many of the largest energy companies in the world operate in places such as Brazil, China, and India. As the need for energy in emerging markets has skyrocketed, so too have the sizes of energy companies headquartered in these markets and there are ETFs that deliver targeted exposure to emerging markets energy stocks.
4. Exploration & Production
Companies engaged in exploration and production activities tend to perform rather well when gas prices rise since higher prices generally results in increased investment in tapping into new reserves and discovering new deposits.
5. Broad Energy ETFs
While achieving “indirect” exposure to energy through stocks is perhaps the most popular strategy, many investors prefer to invest directly in futures products linked to these natural resources. For those who wish to tap into a portfolio of various energy-related futures contracts, broad energy ETFs might be worth investigating. These ETFs generally deliver exposure to crude oil, natural gas, and a handful of other energy commodities.
6. Crude Oil ETFs
For those seeking more targeted exposure to oil futures, crude oil is often a popular destination. There are a number of ETFs that deliver access to this commodity, each offering slightly different exposure through various contract lengths and roll strategies.
7. Exploration & Production
Companies engaged in exploration and production activities tend to perform rather well when gas prices rise, since higher prices generally results in increased investment in tapping into new reserves and discovering new deposits.
The volatility switch has flipped favorably in the energy sector, creating opportunities for investors ready to buy at increasingly attractive entry points. Familiarizing yourself with these basics is the first step towards learning about energy investments and the possibility of lucrative investment opportunities.