The Best Energy ETFs For Swing Trading

The Best Energy ETFs For Swing Trading

Investors have incurred major losses on energy plays in the last two years, in a virulent downtrend that’s dropped crude oil to a multi-year low. Bear markets in natural gas, heating oil, and unleaded gasoline have contributed to the downside, which shows no signs of letting up in 2016. Meanwhile, swing traders have enjoyed dozens of profitable opportunities, going short in declines and long in sizable recovery drives.

Swing traders look for technical setups in which charts show favorable reward: risk on one side of the market and clearly defined entry prices where stops can be placed, should the market move against them. This strategy may be better suited to the energy bear market than long-term investment and could mark the most favorable way to build sector profits in coming years.

Energy Funds For Swing Trading

Sector exchange-traded commodity and equity funds offer excellent swing trading plays, thanks to high liquidity, low expense ratios and wide range price movement that can produce outstanding profits. Also, ETFs avoid news shocks that can send individual securities into countertrend spirals, raising odds for large losses despite broad tailwinds.

25 equity energy ETFs meet the diversity needs of swing traders, but many of these instruments are relatively thin, with wide bid/ask spreads that add considerable risk on the long and short sides. Meanwhile, four highly liquid sector funds stand out as the best ETFs for this strategy. These instruments are evenly divided between exploration, production and oil services, as well as crude oil and natural gas resources.In addition, commodity funds US Oil Fund (USO) and US Natural Gas Fund (UNG) provide relatively direct access to underlying futures contracts at very low cost. USO currently trades 27,087,711 shares per day on average while UNG trades 5,619,503. Both instruments make excellent trading vehicles when commodity markets are pushing contracts higher or lower in trend waves.

However, contango and backwardation affect the pricing of these instruments, triggering underperformance compared to futures contracts that are set to expire sooner. This impact tends to be greatest in volatile conditions when the short-dated contract month moves more sharply than long-dated futures. For this reason, an aggressive swing trading strategy is needed, in which profits and losses are taken quickly, compared to long-term positions or investments.

The Energy Select Sector SPDR Fund (XLE) stands at the top of the heap as the most popular energy equity fund. This is a passive ETF that holds more than $11-billion in assets and carries a low expense ratio at .14%. It seeks to replicate the Energy Select Sector Index, which utilizes a modified market capitalization methodology and includes oil, gas, other fuels, equipment and services companies. The fund pays a 2.96% dividend yield.

SPDR S&P Oil & Gas Exploration & Production ETF (XOP) seeks to match performance with S&P Oil and Gas Exploration and Production Select Industry Index. It carries a higher expense ratio at .35% and holds $1.6-billion in assets. The fund, which came online in 2006, now shows the second highest volume in this category and often displays greater percentage movement than the XLE. It currently pays a 2.07% dividend yield.

Market Vectors Oil Services ETF (OIH) came public in its current incarnation in December 2011 but has traded under different legal entities with the same ticker since 2001. The fund holds $1.2 billion in assets with a .35% expense ratio and very tight bid/ask spread. It tracks Market Vectors US Listed Oil Services 25 Index, which utilizes a market capitalization weighting methodology. It currently pays a 2.83% dividend yield.

Natural gas has been engaged in a longer and deeper bear market than crude oil in the last two years. First Trust ISE-Revere Natural Gas Index Fund (FCG) follows the identically named index, offering broad exposure to the equity side of the business in an equal weighted instrument comprised of exploration and production companies that focus resources on natural gas.

This is a much smaller ETF than SPDR and Market Vector entries, holding just $189.30 million in assets. It also carries a high expense ratio, at .60%, and a wider bid/ask spread. Fund performance reflects the commodity’s long bear market, standing at -54.46% over the last 5-years. It currently pays a 4.36% dividend yield.

The Bottom Line

Swing traders can focus on six highly liquid exchange traded funds to play the ups and downs of volatile energy markets. Popular commodity funds for crude oil and natural gas can be bought and sold while five sector funds divide the energy complex into specific sub-sectors that may act much better or worse than the broad grouping.