Energy ETFs: Bargains or Falling Knifes?

The price of crude oil has fallen nearly 25 percent since June and hit the lowest level in years last week. The increase in supply from the U.S. shale boom, slowing demand around the globe, and the rise in the U.S. Dollar were the perfect storm for lower energy prices.

As the price of the commodity fell it led to investors taking the energy stocks out to the wood shed and pushing many to multi-year lows. Any ETF related to energy has suffered along with the fall in the sector and investors are torn. One camp believes energy ETFs are now at levels that make them very attractive long-term buying opportunities. The other side sees oil falling into the $70’s, if not $60’s and that would suggest another big swoon lower for energy stocks.

Nobody knows where oil will eventually find a bottom, however it is time to start looking at the carnage done to the energy ETFs and to see if there is an opportunity.

SPDR Energy ETF XLE lost 24 percent from the high in late June to the low hit last week. The ETF had not traded at such levels since June 2013. After hitting a low of $77.52 the ETF started to attract buyers as investors moved back into equities at the end of last week. The ETF nearly reached $86 by Friday before closing well off the intraday highs. The ETF is a basket of 45 stocks that is made up of the who’s who in the U.S. oil sector. Top holdings are Exxon Mobil XOM and Chevron CVX. The ETF charges a 0.16 percent expense ratio and pays a 2.1 percent dividend.

The Market Vectors Oil Services ETF OIH took an even bigger hit, falling nearly 30 percent from the July 1 high. The ETF is highly concentrated in two positions, Schlumberger SLB andHalliburton HAL; they account for one-third of the portfolio. The remaining 24 holdings are also in the oil service niche sector that has been hurt by the sluggish rig business. The ETF has found some support at the $41 area, however a lack of follow through last week could suggest the rally will be short-lived.

One of the ugliest charts the last few months has been the First Trust ISE-Revere Natural Gas ETF FCG. The ETF lost 44 percent of its value from the high in June to the low of last week. The issue with the natural gas plays is that a drop in energy prices could lead to a slowdown in the fracking boom in the U.S. due to cost issues. On the other hand, fracking is still profitable with oil above $80 and some experts debate it will remain in the green with oil in the $70’s. The ETF broke long-term support at $14.11 before bouncing back the last few days. Another breach of the support line would likely suggest a new leg lower.

Only time will tell if this week is a buying opportunity for the energy ETFs. But as a long-term investor it typically works the best when buying into solid long-term ETFs when they are on sale. For FCG the sale price happens to be the largest.