The Best Way To Invest In The Energy Sector In 2020

So, how well have inverse oil ETFs performed? 

According to data by ETFdb, all the top 7 inverse oil ETFs are deeply in the red with leveraged ETFs being particularly badly hammered.

Source: ETFdb

Lesson learned: If you want to play the shorting game, it’s advisable to focus on individual companies. 

That said, the EIA has forecast that crude oil prices will be lower on average in 2020 than in the current year mainly due to rising global oil inventories, particularly during the first half of 2020.  Related: Shale’s Debt-Fueled Drilling Boom Is Coming To An End

If things pan out this way, shorting oil might actually pay off during the first half of the year.

Playing the long game

Shorting oil has generally not worked well in the current year. Generally, ETFs that directly track oil prices have done surprisingly well. These include:

1. PowerShares DB Oil Fund (DBO)

Average volume: 493,566

Assets under management: $433.79 million

Total expense ratio: 0.75%

YTD Returns: 21.96%

This index fund is based on the value of WTI futures contracts with 100% of its net assets in WTI crude oil futures.

2. The United States Brent Oil Fund (BNO)

Average volume: 160,155

Assets under management: $94.01 million

Total expense ratio: 0.90%

YTD Returns: 28.25%

BNO tracks the daily price movements of Brent crude oil. The fund primarily invests in Brent crude oil futures contracts but also includes other oil-related futures contracts, swap contracts, forwards, U.S. government obligations, cash and cash equivalents.

3. The VanEck Vectors Oil Refiners ETF (CRAK)

Average volume: 8,429

Assets under management: $24.82 million

Net expense ratio: 0.59%

YTD Returns: 7.68%

CRAK attempts to replicate the performance by the MVIS Global Oil Refiners Index, essentially meaning it tracks the performance of companies involved in crude oil refining.

Given the somber outlook for the oil sector in 2020 by the EIA, shorting these 3 ETFs might be a better strategy than playing the long game. 

The EIA expects WTI to have another rough year, with prices averaging $5.50/barrel less than Brent prices in the coming year.

Invest in high quality oil stocks

Nowadays, when talking about high-quality energy stocks, most experts usually refer to defensive stocks that can withstand the market downturn without too much capital erosion or those with minimal risk of going under.

However, BofA Merrill Lynch recently tapped Exxon Mobil Corp.(NYSE:XOM) as its top 2020 pick, saying XOM shares could surge nearly 50%. The banker has cited the company’s production ramp-up and growth acceleration particularly in new oil fields in Guyana.

It’s worth noting that although Moody’s downgraded XOM’s credit outlook to Negative from Stable due to its high capex, it maintained the firm’s AAA credit rating, citing its vast reserves.

Investors should hunt for companies with similar credentials.

Go green

If you are one of the many environmentally conscious investors who would like to join the growing Environmental, Social and Governance (ESG) drive, consider investing in green or climate bonds. These are bonds offered by governments or companies for investment in renewable energy, water, green buildings (energy efficient buildings), and even agriculture.

Billions of dollars have been pouring into green investments as they increasingly move to the mainstream. Two of the leading green bond ETFs are the VanEck Vectors Green Bond ETF(GBRN) and the iShares Global Green Bond ETF (BGRN).

By Alex Kimani for Oilprice.com

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