Tue Jan 19 2016
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If the Oil Crash Continues, Buy These 5 ETFs to Outperform

This plunge in crude—at least to these levels—was somewhat unexpected by most market participants and it underscores just how quick and devastating the slump has been for most. And with prices this low, things like bankruptcies or bond payment issues are starting to come on the table too.

Any hope for changes this year?

Arguably the worst part about the oil slide for many industries is how likely it appears to remain the top story this year too. There are numerous global factors which appear likely to keep oil prices mired at low levels for quite some time (see 16 Bold ETF Predictions for 2016).

On the supply side, Iran looks to keep the pressure on the oil market as its sanctions have finally ended. This looks to open up Iranian crude to global markets putting a fresh 500,000 barrels a day initially on to the world stage and eventually hitting two million barrels. Add in possible increases from North America and countries like Libya, not to mention cash-strapped nations that can’t afford to slow down production, and you can make the case that the world will remain awash in crude in 2016.

And on the demand side of the equation, the picture isn’t much better thanks to greater levels of fuel efficient vehicles, lower manufacturing activity, and sluggish global growth. Chief among the global slowdown concerns is of course China, a nation which was once an engine of growth (and massive increases in commodity consumption), but no longer appears to have the appetite that it once did, potentially keeping a lid on oil prices from this perspective too.

How to Play

And while we have to be approaching a bottom soon, even if oil prices just stay at these levels we should see some industries win and other lose from this environment. For some ETF ideas on which segments will definitely be the ones to follow if that is the case, make sure to closely watch the five funds below as potential winners in a continued low oil environment:

PowerShares Dynamic Leisure and Entertainment ETF (PEJ – ETF report)

One area that looks to benefit from low energy prices is the consumer market as people look to have more disposable income to spend on discretionary products. The consumer sector did lead the market last year and we could be in for another year of outperformance here if the job market remains stable and low oil prices continue to put more money in peoples’ pockets (see all the Consumer Discretionary ETFs here).

This should benefit companies in heavily-discretionary industries like airlines, travel, and restaurants. Somewhat unsurprisingly, airlines, leisure & recreational services, and restaurants all have Zacks Industry Ranks in the top 25% right now.

These trends make PEJ an ETF to watch as over half of its portfolio is focused on airlines, restaurants, and hotel & leisure facility operators combined. The fund also has a nice mix for cap size so it should offer up a pretty diverse list of choices to investors seeking to play this in-focus industry. And with its Intellidex method, only the most favorable stocks on a number of key characteristics will be included in the portfolio anyway.

Market Vectors Oil Refiners ETF (CRAK – ETF report)

If you believe in an energy slump but still want some exposure to the sector, than CRAK could be the way to go. Companies in the refining segment benefit from lower oil prices as crude is one of their main input costs. They then take this crude and turn it into refined products, so as long as prices for things like gasoline, jet fuel and the like stay relatively high (compared to crude) refiners can make plenty of profits off of this spread.

So while this is definitely a risky area, it is also a potentially profitable one in the energy space. Plus, the oil refining and marketing segment currently has a Zacks Industry Rank in the top third, so earnings estimates are coming in nicely for this space too (16 ETFs You Can’t Go Wrong with in 2016).

The only real way to play the space right now is with CRAK, an ETF that focuses solely on this market holding about two dozen stocks in the space. Top holdings include Valero Energy and Reliance Industries, but the ETF is pretty spread out overall. Just remember, this is also dependent on those refined product prices, but companies here have certainly held up better than those in the exploration segment as of late.

ProShares UltraShort Bloomberg Crude Oil ETF (SCO – ETF report)

If you really believe that oil prices are going even lower from here than SCO is a safe bet. The fund looks to provide investors with double the inverse return of the Bloomberg WTI Crude Oil Subindex. So, if this benchmark goes lower by 1% on a day, SCO should add 2% in the same session.

The fund has already added over 167% in the past six months while it has zoomed higher by 47% in the last month alone. Clearly, it is a top fund to benefit from a continued—and quick—fall in crude oil prices (see 4 Inverse ETFs to Short Oil as Crude Prices Tumble ).

Just be careful, as inverse and leveraged ETFs are only designed to be held for a single session and you can face some rebalancing issues when holding over long time periods (making products deviate from long term expectations). That is why a -1x fund like DNO could make more sense for some, though it is always important to watch out when dealing with the commodity and inverse markets.

iShares India 50 ETF (INDY – ETF report)

India is a major emerging market that is almost entirely dependent on exports to fuel its oil needs. While that has been an issue in past years, it now appears to be a blessing thanks to low prices. In fact, with recent troubles in China and commodity worries in Brazil and Russia, India appears to be a best-of-the-BRICs choice for 2016.

There are a number of quality India ETFs to play this trend and a small cap approach with an ETF like SCIF is definitely a way to go. However, a large cap ETF could offer up a bit more stability, and be more liquid as well (see Top Ranked ETFs to Tap India’s Growth Story).

That is why I am going to highlight INDY today, a fund that tracks the Nifty 50 Index which looks at the 50 largest publically traded Indian companies. Finance receives a big weighting with 22% going to banks, but computer software (16.2%) also has a nice allocation too. And with India doing much more business with the EU and the U.S. than China or commodity-centric powers, it should be a relatively well-protected emerging market for 2016.

ProShares S&P 500 Ex-Energy ETF (SPXE – ETF report)

If you are just looking to avoid the energy sector this year, SPXE could be an overlooked but solid pick. This fund takes the S&P 500 and simply removes any exposure to the energy sector, dividing up that allocation among the rest of the market instead.

So instead of putting roughly 7.1% of its assets into energy, SPXE will simply add a little bit more to the remaining sectors. This increases tech’s weighting to 22.5% from 20.9%, while it boosts financials by about one percentage point, and the same with health care.

This makes SPXE a relatively cost effective (27 basis points a year) and diversified way to play the U.S. market without the influence of the energy segment. Yields are also comparable to the S&P 500 overall, so this is a way to easily bet on more underperformance from last year’s worst major sector.


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