Investors Anticipate Oil Gain by Shifting Cash Into ETFsJim Polson
Investors are pouring money into energy companies, putting seven times as much into exchange-traded funds as they did last quarter.
They are betting oil and gas get more expensive and fatten profits of producers from Devon Energy Corp. in Oklahoma to Pakistan’s Oil & Gas Development Co. Those are two of the stocks held in the $39 billion U.S. market of energy-sector ETFs, which took in $2 billion in new money since Dec. 31.
“The size of the flow is unequivocal,” said Bruno del Ama, chief executive officer of Global X Management Co. in New York, which manages $3.4 billion. “Energy is becoming a favorite of ETF investors.”
So far, global benchmark oil is below 2013’s average and year-end prices. U.S. oil is little-changed. At State Street Corp.’s $8.7 billion Energy Select Sector SPDR Fund, the biggest U.S. energy ETF, all of the increase in assets this year was from fresh money: Investors poured in $809 million even as the per-share price dropped 1.4 percent through yesterday.
Money flowing through ETFs is one indicator of investor sentiment that’s gaining influence compared with traditional measures such as share performance or commodities prices. Bullish trends can appear earlier in the $303 billion market of “sector” funds, which range from health care to real estate.
Energy prices often climb with economic growth, as new car sales and factory orders drive demand for everything from petrochemicals to gasoline. Worldwide gross domestic product will rise 2.8 percent this year, beating last year’s 2.1 percent rate, according to economists’ estimates compiled by Bloomberg.
U.S. GDP will rise 2.9 percent this year, the fastest rate since the recession in 2008 and 2009, the Federal Reserve says.
“Energy is well-positioned for economic expansion,” said Ryan Issakainen, an ETF Strategist at First Trust Advisors LP in Wheaton, Illinois. It’s also “relatively cheap as a sector.”
Energy collecting new money reflects optimism for a turnaround in companies like Exxon Mobil Corp., the State Street fund’s biggest holding, down 5.8 percent this year. The bet may not pay off. Analysts are forecasting drops in global oil prices in 2014 and gains in gas.
A key indicator is net new money from investors -- or fund purchases minus redemptions. ETFs focusing on oil and gas companies have captured 22 percent of the $10 billion in net inflows into those ETFs this year, according to data compiled by Bloomberg. They hauled in only 2.5 percent of fresh money last quarter, and 7.7 percent in all of 2013.
“Buoyant gas and oil prices have helped” provoke the increase in 2014, according to Andrew Cosgrove, who analyzes monthly money flow in energy stocks for Bloomberg Industries.
The biggest outflow this year is in discretionary consumer goods funds, which hold companies like Las Vegas Sands Corp., shrinking by $2.4 billion to $14 billion in assets.
“Because these products are large and extremely liquid, they can be used tactically,” said David Mazza, head of ETF research at State Street. That lends itself to early and short-term bets on energy prices, he said.
Some investors expect energy stocks to rise. Others want to spread their money around to reduce the risk of losses in other industries.
Brent crude, the world oil benchmark, is trading at $107.62 a barrel, headed for its first weekly gain in a month. It’s still below the average price for the past two years and the year-to-date average.
“Clients are telling us they’re more willing to take on risk in sectors like energy and materials which tend to be driven by that pickup in global growth,” Mazza said. Some, he said, are betting on earnings surprises as companies report first-quarter results next month.
U.S. natural gas futures dropped near a 10-week low yesterday while supplies of the heating fuel were at the lowest level in more than a decade. Gas for April 2015 delivery in Europe’s biggest market is selling at a 12 percent premium to next month’s contract.
“The fun play is natural gas,” said Donald Coxe, who advises on $200 million at Coxe Advisors LLP in Chicago. “We’re going to need massive production by September to get through another winter if the next winter is as cold as this one.”
In the short term, ETF money flows are subject to wide swings. While investors poured almost $2.7 billion into U.S. energy ETFs in February’s second half, more than $990 million was pulled out in the first two weeks of March.