On this week’s episode of ETF Prime, Stacey Morris, CFA, head of energy research at VettaFi, discussed the state of play for the energy and energy infrastructure sectors. Afterward, Mike Akins, founding partner at ETF Action, joined the podcast to break down ETF flows.
Energy State of Play
To start, Geraci asked Morris for her take on where the energy space currently stands. He also noted that the energy sector has been the worst-performing sector this year.
Morris noted that there are a few macro elements driving the energy sector’s current performance. Much of the market’s focus is being driven by interest rates coming down. She added that lower rates do not necessarily help the energy sector.
Looking specifically at the energy sector, Morris noted the price of oil is down nearly 20% from a year prior. Oil isn’t the only area struggling, as she added that natural gas prices have not done particularly well this year either.
“It’s a combination of factors and a backdrop that makes it hard for energy to compete for investor attention,” said Morris. “Energy struggles to get a lot of interest or attention in this type of environment.”
Energy's Shining Star
While the energy sector has certainly struggled this year, Geraci noted there’s a resonating bright spot in the energy field: infrastructure. With energy infrastructure ETFs continuing to produce strong results. Geraci asked Morris how these funds have been doing so well.
For midstream companies, Morris noted that these companies are unique due to their fee-based business models. Their contracts are long-term and inflation-adjusted. That allows midstream companies to deliver strong cash flow regardless of where oil or natural gas is currently priced.
Additionally, Morris highlighted how midstream ETFs are offering strong yield at this time. As examples, she noted that the underlying index for the Alerian MLP ETF (AMLP ) was yielding 7.2% as of Friday, while th Alerian Energy Infrastructure ETF (ENFR ) offered a yield of about 5.5%.
Looking at ways for investors to play a rebound in oil and gas prices, Geraci highlighted a recent article Morris wrote on production and exploration for oil and natural gas. He then turned back to Morris and asked her to explain why having refiners in an energy portfolio can potentially drag performance down.
She asserted that having exposure to refiners will not help investors stay engaged in energy prices. While this may surprise some investors, Morris noted that high oil and natural gas prices may not necessarily benefit refiners.
In particular, she pointed out that refiners often fuel their facilities using natural gas. Therefore, higher natural gas prices can lead to higher natural gas costs.
Focusing Energy Exposure
As an option for more pure exposure to energy producers, Morris highlighted the Texas Capital Texas Oil Index ETF (OILT ). To be included in the underlying index for OILT, she noted that companies must produce oil and natural gas in Texas. As such, this fund can help investors stay away from the companies in the energy space that are not actually producing oil or natural gas.
“When you are looking to buy something or you own something, it’s important to know what’s actually in it, and what actually you’re getting in terms of exposure,” Morris added.
Rise of Active Management
To close out this week’s episode, Geraci brought on Mike Akins, founding partner at ETF Action. Given that ETF Action tracks ETF flows, Geraci noted that ETFs have seen about $665 billion in flows this year. He then asked Akins if any of the flows data has particularly stood out to him.
Akins noted that about two-thirds of flows went into beta strategies. But he was surprised to see a large number of flows going into active strategies. Essentially, investors moving away from beta strategies are more likely than not to pivot to active management. Additionally, Akins noted that this trend has been persisting across both equity and fixed income strategies.
“The thing is, most of the active strategies, their price points are coming in line with those smart beta strategies. So you’re really just getting that little additional benefit of a professional’s ability to tweak the strategy as markets warrant,” Akins added.
Listen to the entire episode of ETF Prime, featuring Stacey Morris and Mike Akins:
Vettafi.com is owned by VettaFi LLC (“VettaFi”). VettaFi is the index provider for OILT, ENFR, and AMLB for which it receives an index licensing fee. However, ENFR, AMLB, and OILT are not issued, sponsored, endorsed, or sold by VettaFi, and VettaFi has no obligation or liability in connection with the issuance, administration, marketing, or trading of OILT, ENFR, and AMLB.
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