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Investing in Energy ETFs

|Includes: IEO, iShares U.S. Energy ETF (IYE), XLE

By Kevin Grewal, Editorial Director at www.SmartStops.net
 
Lately, the producer price index, known as PPI, has shown exhuberance, indicating that economies are starting to bounce back, the demand for products is improving and inflation should not be much of a worry.
 
In August, the PPI, which measures the average change in sales prices, rose 1.7%, after witnessing declines of 0.9% in July and 1.8% in June.  When looking at PPI's sister, the Consumer Price Index, better known as the CPI, it is up 0.4% over the same month.  What this means is that companies were able to get a profit by selling goods to consumers at a slightly higher price than it cost to make them, further enhancing the equity markets.  
 
One issue that some have had with this recent rise in PPI is its heavy dependence on energy.  In fact, when one eliminates food and energy from the reading, the PPI rose by only 0.2% in August.  This further supports the importance of energy on the overall health of the economy.
 
As emerging markets continue to prosper, they will continue to demand energy to fuel their factories and businesses.  Additionally, as the dollar's value decreases many have used crude oil as an alternative currency, or a hedge, which has driven overall commodity prices up.
 
In regards to inflation, it definitely has an effect on PPI numbers, but doesn't appear to be much of an issue over the short-term.  Some ways to capitalize on this dependence on energy are through the following ETFs:

  • iShares Dow Jones US Enegry (NYSEARCA:IYE), up 43% from a March low of $22.71 to a Monday close of $32.41.
  • Energy Select Sector SPDR (NYSEARCA:XLE) closing at $54.71 on Monday from a March low of $38.12, an increase of 44%.
  • iShares Dow Jones US Oil & Gas Exploration (NYSEARCA:IEO), up 73% from its March low of $29.40 to close at $50.87 on Monday

When dealing these ETFs, one must keep in mind the inherent risks involved.  To help mitigate these risks, an exit strategy is vital.  According to the latest data from www.SmartStops.net, the price levels at which an uptrend could come to an end in these ETFs are: IYE at $30.87; XLE at $52.31; IEO at $48.37.  Theses price levels change on a daily basis to reflect market volatility and updated data can be found at www.SmartStops.net