Russia’s invasion of Ukraine and the global response with the sanctions imposed on the Putin’s state will continue sending oil and gas prices soaring.
The war in Ukraine injected more uncertainty into the global economy sparking the concerns that already dangerous inflation numbers will continue to go up even higher.
The Brent Crude Oil hit the price of $140 a barrel early in March 2022 and remains in uptrend trading at around the level of $117 a barrel as of Friday, March 25th.
President Joe Biden made it very clear in his speech on Saturday March 26th, 2022 in Warsaw, we need to remain unified for the years and decades to fight for freedom and prepare ourselves for the costs of this fight.
We must commit now to be in this fight for the long haul. We must remain unified today and tomorrow and the day after and for the years and decades to come.
It will not be easy. There will be costs. But it’s a price we have to pay. Because the darkness that drives autocracy is ultimately no match for the flame of liberty that lights the souls of free people everywhere.
Time and again, history shows that it’s from the darkest moments that the greatest progress follows. And history shows this is the task of our time, the task of this generation.President Joe Biden said in Warsaw on March 26th.
It seems the war is not going to end any soon and the exclusion of Russia from the global economy and trade will come at the high cost of the energy commodities.
The sanctions imposed on Russia caused the western exchanges halt in Russia ETFs trading due to the regulatory measures. As a result of the restrictions, the VanEck Vectors Russia ETF (RSX) stopped trading and the daily performance chart looks constant now. The ETF is illiquid.
Russia is one of the major global energy producers and that was reflected in the RSX ETF sector breakdown.
The RSX investors interested purely in energy had to shift their focus towards the other ETFs offering exposure to the oil and gas sector. As good alternatives to the RSX it is good to consider the U.S. energy stock ETFs like the XLE, VDE or XOP as well as the country specific ETFs focused on the energy producers like the KSA (Saudi Arabia) or GXG (Colombia).
Let’s have a closer look at the mentioned ETFs.
1. The Energy Select Sector SPDR Fund (XLE)
The XLE is the largest U.S. energy sector ETF. The AUM of the fund was approx. $37.8bn as of March 24th, 2022. The fund offers 21 holdings and comes at the cost of only 10 bps.
This ETF definitely carries single stock risks due to the Exxon and Chevron allocations which constitute approx. 44 percent of the total portfolio. That’s a lot and a very high stocks concentration level.
The outperformance of the XLE over the SPY ETF is very clear as the ratio of the XLE vs. SPY ETF has been in uptrend since the beginning of this year.
2. Vanguard Energy ETF (VDE)
The Vanguard product seems like a direct competition to the above XLE ETF. The VDE was $9.4bn in size as of February 28, 2022 and costs also 10 bps.
As of end of February 2022, the fund had 103 holdings. However, it is still concentrated as the Exxon and Chevron constitute approx. 38 percent of the total portfolio.
The VDE vs. SPY ratio is self-explanatory and confirms the strong U.S. energy sector outperformance since the beginning of this year.
3. SPDR S&P Oil & Gas Exploration & Production ETF (XOP)
This ETF sounds like a good option to investors who are looking for the high level of stock diversification with no single stock risks. The portfolio of the size of $5.7bn offers 61 stocks at the cost of 35 bps.
Please see below the XOP vs. SPY ratio remaining in the uptrend since the beginning of 2022.
4. iShares MSCI Saudi Arabia ETF (KSA)
The KSA ETF is focused on the Saudi Arabia economy that is driven predominantly by the energy sector, however it is not reflected directly in the sector breakdown as the energy sector is approx. 6 percent of the total portfolio. It should be kept in mind the other sectors benefit from the investments into the energy companies and the country is one of the largest oil producing players on the globe. Hence there is a strong correlation between the oil prices and the KSA performance.
The KSA portfolio is concentrated in two Saudi Arabia financial institutions that constitute approx. 27 percent of the ETF with the total number of 87 holdings in the portfolio. The total AUM of the fund is nearly $1.5bn and the expense ratio is at the level of 74 bps.
Like the U.S. energy stocks the KSA ETF also has been outperforming the SPY ETF this year. Investors should keep in mind the Saudi Arabia product brings the extra risk of the local currency.
5. Global X MSCI Colombia ETF (GXG)
The GXG ETF is another country specific product with exposure to a commodity producing country. Colombia has a thriving market economy based primarily on oil, mining, agriculture, and manufacturing and it benefits during the periods when energy prices go up. This ETF allocates directly 20 percent of its assets towards the energy sector.
As of March 24th, the fund’s size was approx. $41m with the total number of 26 holdings at the cost of 61 bps. The portfolio is very concentrated with the top two companies accounting for approx. 30 percent of the total ETF.
The GXG vs. SPY ratio has been in uptrend since the beginning of this year. Investors should keep in mind the Global X Colombia ETF carries the extra local currency exposure/risk.
Are there any more ETFs benefiting from the current crisis?
The war in Ukraine is also pushing the prices of the aerospace and defence sector which is another way to play the current investment situation. On the other hand the forthcoming food shortages can be hedged through the exposure to the commodities, commodity producers and food selling companies which can be accessed via dedicated ETFs and have been already discussed in the previous investment pieces. Check out the below articles.
Please note, the above article is dedicated to the ETFs listed on the U.S. exchanges. If you are interested in the European listings, please send me a direct message to discuss the best equivalent investment options on the other exchanges.