After A Rally, Investors Are Skittish About Energy ETFs

The Energy Select Sector SPDR (ETF) XLE is up 1.2 percent year to date. That does not sound like much, but it is a far cry from the savage losses incurred by the benchmark energy exchange traded fund in each of the past two years.

In March, XLE surged 7.4 percent, outpacing the S&P 500 by 310 basis points. Last month, XLE actually outpaced the United States Oil Fund LP (ETF) USO, which tracks front-month West Texas Intermediate futures, by 140 basis points. Even with impressive March showings, some oil ETFs are not luring investors.

Actually, the opposite is true as some market participants are using the March commodities surge to take profits in oil exchange traded products, indicating that some traders and investors see limited near-term upside for crude.

Oil And Oil ETFs

“Investors have been lacking faith in oil’s recent rally as they have been actively selling out of oil ETFs since the end of February. Investors had actively poured money into ETFs and that tracked the value of crude oil as the commodity continued to sink to new lows in the months leading up to February, pulled over $1.2 billion out of the 124 such funds during March,” said Markit in a new research note.

The research firm notes the VelocityShares 3x Long Crude Oil ETN linked to the S&P GSCI Crude Oil Index Excess Return UWTI has been hit especially hard by recent outflows.

UWTI “has felt this trend most acutely as investors cashed out $386 million over the month, roughly 40 percent of its total AUM,” said Markit.

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That after UWTI soared nearly 14 percent last month. The ETN became a favorite of daring traders as it sank to near penny stock levels during oil's swoon, continuing to add assets even as crude prices faltered. So prolific was UWTI's asset-gathering pace during oil's slump that it became the second largest oil-related exchange-traded product on the market behind USO.

XLE, the largest equity-based energy ETF, has proven to be an exception to the rule of outflows from energy ETFs. Investors have poured nearly $95 million in new capital into XLE since the start of March. The same cannot be said of some of XLE's rivals.

“Equity funds which invest in oil and gas producers have also seen similar asset flows as investors pulled over $225 million out of the 87 such ETFs. Much like their peers which invest indirectly in the commodity, the cash pulled out of oil ETFs over March marked the largest exodus from the asset class of the most recent cycle as the outflows have been the most severe since May of last year,” said Markit.