Energy ETFs In a Slump?

With oil prices down sharply from its peak, some investors who invest money into energy-sector exchange traded funds (ETF) have slipped up as well. From its July peak of close to $80 a barrel, oil prices have fallen about 22 per cent and pulled down stocks of major energy companies along with it.

ETFs in the energy sector haven’t bucked the trend. With about $4.6 billion in assets, Energy Select Sector SPDR Fund, the largest energy-oriented ETF, has dropped 9 per cent from mid-July. Investors see the quick downfall of oil-related ETFs as a reminder of the volatility inherent in betting on narrow slices of the stock market. ETFs are similar to index-oriented mutual funds but trade on an exchange, like a stock. There are many ETFs which replicate broad well-known stock market indexes like the S&P 500.

Many advisors warn against Main Street investors using ETFs to pile into hot sectors, rather than cautiously investing their money over all kinds of investments. For investors
who think a recovery in oil prices is in the cards, energy-related ETFs would be a good bet since they hew to their index of choice. Unlike actively traded mutual funds, energy?related ETFs don’t boost holdings of cash or take other measures that would buffer their fall or limit their gains should oil prices rotate.

With energy prices falling, there have been big outflows in energy ETFs. However the
outflows don’t necessarily indicate that investors are cutting contact to energy stocks. Since ETFs can be sold short or used to hedge complicated bets on market, analysts warn frequently that ETF asset flows give a clearer picture of institutional trading activity than investors attitudes. In reality, while energy ETFs have lost assets recently, the outflows began in July, when oil was at its crest. Energy sector ETFs witnessed net outflows of about $234 million in July and $507 million in September. Some analysts think what happened is not a reflection on sentiment in the market but an institutional activity.