Energy ETFs surge on higher commodity prices

Experts discounted the potential for the sector coming into 2014, but large caps have been soaring.

By Benzinga Apr 21, 2014 4:08PM

Caption: Oil and gas platform
Credit: © curraheeshutter/Getty ImagesBy David Fabian

The energy sector has been trading sharply higher as rising oil and natural gas prices create a sturdy tailwind for many integrated service and exploration companies.

After a frightening dip in January that tested the 200-day moving average, the Energy Select Sector SPDR (XLE) has rocketed to new all-time highs. In fact, XLE has now gained over 4 percent in the month of April and more than 13 percent since its February low.

This ETF is the largest and most heavily traded large-cap energy index, which encapsulates 44 companies and over $10 billion in total assets.

Many experts discounted the potential for the energy sector coming into 2014 as skepticism about the future of commodity prices weighed on revenue growth prospects.

However, since the beginning of the year, the United States Oil Fund (USO) has gained 6.12 percent and the United States Natural Gas Fund (UNG) has jumped nearly 26 percent. Weather-related factors have played a big role in the first quarter surge for natural gas this year.

In addition, this sector has likely benefited from the rotation out of high-beta growth stocks and into value-oriented segments that are more defensive in nature. The energy sector is the second largest allocation in the iShares S&P 500 Value ETF (IVE), with more than 15 percent of the underlying holdings.

Moving forward, first-quarter earnings announcements are going to be a key driver of price appreciation in this sector.

Schlumberger (SLB) recently reported a record first quarter profit as demand for its advanced energy exploration technology continues to grow. SLB represents more than 20 percent of the MarketVectors Oil Services ETF (OIH) and is also a top component in XLE as well.

There are a number of different ETF alternatives to play the energy sector, depending on your preference of large integrated oil companies, master limited partnerships, or smaller equipment and exploration names.

In addition, you have the option to invest directly in crude oil or natural gas prices if you believe their upward momentum will continue.

This diversification and flexibility make ETFs an excellent choice for those seeking exposure to the energy theme.

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