XLE DOESN’T ALWAYS GUSH WHEN OIL RISES
By David Fry, Founder & Editor of ETF Digest (www.etfdigest.com)
Many investors have benefited handsomely by investing in XLE (Energy Sector ETF) since the energy price run-up from late 2004. However, XLE doesn’t always match the performance of spot energy prices. Why?
XLE, of course, does not trade every day in the market based exclusively on the general price of spot energy markets. XLE trades like any other security. If investor sentiment is positive, XLE will no doubt rise. However, when stocks in general are bearish, even XLE can fall even though energy prices are rising. For example, on April 18, 2005, XLE dropped 3.8% even though crude oil prices were relatively unchanged. This frustrates investors who feel entitled to comparative performance. The problem is that when overall investor sentiment is extremely bearish, such as during the referenced occasion, XLE is treated like any other stock investors are unloading.
Another example in a different sector is gold stock performance versus spot gold prices. In the two week period from April 8-20, 2005, the HUI (American Stock Exchange Gold Bug Index) dropped 11% while spot gold prices rose almost 2%. However, GLD (Gold ETF), the first commodity-based ETF, also rose, as it should, by the same amount (2%). Therefore, gold stock investors were not enjoying the benefit of the metals rise because, like XLE, investor sentiment was bearish on all stocks.
Of course, the opposite situation can occur when sentiment is bullish leading to out-performance by both XLE and stocks within the HUI. This may occur owing to higher dividends for both XLE and gold stocks as represented by HUI among other reasons. I also believe it’s the intention of the AMEX to have a HUI-based ETF issued in the future.
What this indicates is a clear need for a commodity-based ETF in energy; be it crude oil, gasoline, natural gas and so forth. The ETF Digest is aware of attempts being made by various organizations to issue more commodity-based ETFs. Currently these efforts are stymied by complex regulatory issues involving the SEC and other organizations.
We’re hopeful that potential issuers are able to overcome regulatory difficulties to make more commodity-based ETFs available to meet investor needs. Investors require more, not less, ETFs of this type to include general commodity indexes and currencies. Having them will provide more tracking efficiencies while providing more uncorrelated ETFs to help diversify investment portfolios. Doing so reduces risks and increases overall portfolio return. |
