The world was shocked when the Brazilian energy PBR) announced in 2007 the discovery of a massive oil .Petrobras (NYSE:
Buried deep under the Atlantic Ocean, the Tupi oilfield, due east of Rio De Janeiro, was said to contain 5 billion to 8 billion barrels of oil.
Quite suddenly, this semi-nationalized Brazilian oil company became one of the hottest energy market value north of $200 billion.in the world. Petrobras' tripled in value from the summer of 2007 to the summer of 2008, pushing its
But this story doesn't have a happy ending. Getting to all that oil proved costly, and it's taking a stock has since cooled off.longer to generate production than had been hoped. A once-hot energy
In fact, some ETFs directly focus on energy prices, bypassing the companies involved in energy extraction, refining and marketing. Let's take a closer look.
XLE) is a favorite choice for many. This charges a measly 0.18% annual expense fee and lets you own a little piece of the industry's best companies. Here's a look at the top five holdings.(NYSE:
The third-largest holding in this SLB), isn't even an energy producer. The company provides a wide range of services to the top energy producers and tends to benefit when energy prices are firm and energy drilling activity is robust. This fund also owns many of the U.S. firms that are focused on the natural gas opportunities buried in our country's various shale regions., Schlumberger (NYSE:
Other ETFs that focus on energy producers include:
- First Trust AlphaDEX Fund (NYSE: FXN)
Dow Jones U.S. Energy Sector (NYSE:
S&P Oil and Gas Exploration & Production (NYSE:
As the Petrobras example shows, exploring for oil doesn't always reap sudden profits. It's a cost-intensive business, and profit growth can be elusive while companies ramp up their capital spending. That's why some investors prefer to own ETFs that more squarely focus upon the prices of oil and natural gas. As an example, we saw natural gas prices rise more than 50% since the spring of 2012, but companies that produce natural gas didn't see their share prices rise nearly as quickly.
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A quick peek at the U.S. Natural Gas UNG) shows how investors directly profited from spiking natural gas prices.(NYSE:
Just like this fund, there is a corresponding USO) tracks the price movement of crude oil; it delivered robust gains when oil prices shot up in early 2008. Of course, the converse is also true. A sharp pullback in energy prices won't impact the companies' stock prices nearly as much as these commodity-focused ETFs.that focuses on crude oil. The U.S. Oil (NYSE:
Why would a typical investor make such a seemingly bold bet on energy prices? Many people use ETFs like these as a simple DAL) or Southwest Air (NYSE: LUV) would suffer deep losses if crude oil prices surged and airlines became unprofitable. They'd at least gain some benefit by buying these ETFs, which would rise in price if crude oil prices rallied.
investors are also moving more aggressively into "2X" or "3X" funds. These funds move at twice or three times the rate of the underlying price. For example, the ProShares Ultra Dow Jones Crude Oil (NYSE: UCO) is a "2X" fund, which means it rise 20% if crude oil prices rise 10%.
Investors also can position themselves against rising energy prices by buying "inverse" funds, which move in the opposite direction of the underlying commodity price. For example, the PowerShares DB Crude Oil Short ETB (NYSE: SZO) moves in the opposite direction of crude oil prices, while the ProShares UltraShort Dow Jones-UBS Crude Oil (NYSE: SCO) move in the opposite direction of crude oil prices -- at twice the speed.
Lastly, ETFs that focus on companies operating our nation's energy pipelines have become popular. Many of the companies in this industry are structured as Master income at the corporate level. They are known for impressive dividend yields. A popular in this segment is the JP Morgan Alerian MLP ETN (NYSE: AMJ), which currently offers a dividend yield in excess of 5%.(MLPs), which means they don’t have to pay
(Author's note: Two funds cited in this article are referred to as "ETN" or exchange-traded. They are fundamentally similar to ETFs, though they don't own company stock directly and instead own financial instruments, such as issued by the fund's ).