I've had the Energy Select Sector SPDR Fund (NYSEARCA:XLE) on my watch-list since March of 2008. This ETF really took a shellacking in 2008, falling from $80 to $37.40 in March of 2009 and practically collapsed. I thought that either the manager of the fund was a complete moron or it was just bad timing for the fund. It was bad timing. The fund collasped in tandem with the bursting of the oil bubble. However, this fund has been steadily climbing out of the toilet and is now trading at $62 per share, off 25% from its April 2008 highs. It’s best performers in the fund to-date are Schlumburger (NYSE:SLB), ConnocoPhillips (NYSE:COP), Halliburton (NYSE:HAL) and Occidental Petroleum (NYSE:OXY), all stellar performers during the oil run of 2004 to 2007. These blue-chip performers have been keeping the fund’s performance steady and have been driving it slightly higher each month.
This fund is extremely volatile and is particularly sensitive to the price movements of crude oil since 100% of the companies in the fund are on the manufacturing or production side of oil and gas industry. You can make money in this fund, but you cannot purchase this fund without purchasing put option(s) to protect your position.A Mar 19 2011 Put option with a Strike price of $60, not including commissions, is $2.68. So for $268 you can buy insurance on a XLE position. Of course, this will definitely raise the price per share of your position, but it may be worth it. Let see: 100 shares @ an average price of $62 per share equals $6200, plus cost of option at $268 equals $6468. You would be paying a 4% premium to maintain this position for a little under four months. If the oil and gas market happens to go south one day, owning some loss insurance on your position would be worth it.
Disclosure: No positions at this time but is currently on watchlist for future purchases