ETFs For Lower Oil Prices

by: Tom Lydon

Falling oil prices have mauled energy ETFs but provided a lift to some sector funds tracking different areas of the economy.

Crude oil prices have slumped over 20% from the 2012 high to under $82 a barrel.

"Currently, crude oil stocks sit at the upward bound of their historic range. For much of the past year they sat well above that range. The supply glut is due, in large part, to the addition of Canadian production to the Cushing Oklahoma oil hub and the ongoing proliferative use of horizontal drilling techniques that allow for substantially higher well saturation than had been possible in decades past," Abraham Bailin for Morningstar wrote in a recent analysis.

Overall global energy demand is low, and the U.S. Federal Reserve is showing no signs of a QE 3. Other factors anchoring crude oil prices are the large U.S. stockpiles that are at about 385 million barrels. Trang Ho for Investor's Business Daily reports that these stockpiles are at 22-year highs and better relations with Iran also supports a supply glut.

Falling oil and energy prices have the ability to lift other areas of the stock market. This movement proves that the commodities market is not as highly correlated the equities market, indicating their diversification benefits.

The retail sector ETF SPDR S&P Retail (NYSEARCA:XRT) will benefit indirectly from falling crude prices, as consumers will pay less at the gas pump and have more cash-in-hand to spend. Which leads to more consumers being able to travel. The ETF is up 10% this year.

The Guggenheim Airline (NYSEARCA:FAA) is poised to gain as a drop in jet fuel will follow lower crude prices. Airlines spent $47 billion on fuel, totaling 16.4 billion gallons in 2011, according to the U.S. Bureau of Transportation. Jet fuel prices have tumbled nearly 20% from their February peak to $2.93 a gallon, reports Ho. FAA has gained 13% year-to-date.

iShares Dow Jones Transportation Average (BATS:IYT) will gain as trucker's profits increase. The stocks in IYT cover railroads, truckers, airlines, marine shippers and delivery services. IYT is up 1.2% year-to-date.

Other oil-focused ETFs that have gained since crude has slumped:

  • United States Short Oil (NYSEARCA:DNO) This fund tracks the opposite moves of light, sweet crude oil. The ETF is up 16% year-to-date, while United States Oil Fund (NYSEARCA:USO) is down 16%.
  • ProShares Short Oil & Gas (NYSEARCA:DDG) DDG tracks the opposite moves of the exploration fund iShares Dow Jones US Energy Sector ETF (NYSEARCA:IYE). When there is a supply gut, exploration is not a top priority. DDG is up 4% in 2012 while IYE has lost 6.1%.

Tisha Guerrero contributed to this article.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.