In the latest episode of Nate Geraci’s ETF Prime, Stacey Morris recapped energy ETFs in 2022 and looked ahead at the energy outlook in 2023. Brett Winton discussed their wild ride over the past several years and offered a case for disruptive innovation stocks moving forward. Jablonski spotlighted their ETF lineup, including the Defiance Daily Short Digitizing the Economy ETF (IBIT ).
The Energy Overview
The , the Energy Select Sector SPDR Fund (XLE ) was up about 50%. Just a few months later and XLE is currently sitting close to its high for the year, up 65%. Morris contextualized this rapid rise by pointing out that the OPEC+ meeting resulted in a cut of two million barrels a day. Oil prices saw a move up in the lead-up to and aftermath of the meeting, going from below $80 a barrel to over $90, lifting the energy sector broadly. “The biggest takeaway in the OPEC+ meeting is that they are willing to intervene to support oil markets, even at a very high political cost,” Morris said.
The energy space also saw generally good results during the Q3 earnings season, which continued to push energy ETFs higher. November saw the broader market improving, with the S&P up about 6% over the month. Morris noted that energy lagged a bit behind that and oil prices did start to come down, but that overall the last few months have been good for energy stocks.
Geraci widened the time frame out, observing that energy has done well despite crude oil’s journey from $120 per barrel to around $80. Morris said that crude’s struggles are coming due to a confluence of factors. She said, “a lot of what we’ve seen is concerns around recession and what that means for oil demand. There’s been a lot of concern around Chinese demand and when will China reopen and when will we see Chinese oil demand meaningfully improve. And then you’ve had releases from the U.S. strategic petroleum reserve, other countries participating in that as well, doing strategic releases and that’s putting more barrels on the market.” Morris also noted that Russia’s exports have been surprisingly resilient as well.
Despite this, energy companies are having solid years, putting up good free cash flow numbers. According to Morris, “there’s an important point to make and distinction to be made between what oil is doing and what energy stocks are doing.” Morris believes that energy stocks aren’t necessarily pricing in what oil does. When it moves up to $120 a barrel, for example, energy stocks have largely reacted like it is still under $80.
Broad, low-cost energy ETFs have done remarkably well. Aside from XLE, Morris pointed to the Vanguard Energy ETF (VDE ) as another energy fund up 62%, joining XLE in edging out the iShares U.S. Oil & Gas Exploration & Production ETF (IEO ) which is up 61% and the VanEck Oil Services ETF (OIH ) which is up 59%. Interestingly, Morris noted the largest oil and exploration ETF, the SPDR S&P Oil & Gas Exploration & Production ETF (XOP ) is only up about 50%. She sees this as likely due to its equal weighting scheme, as the iShares product is market cap weighted.
Morris observed that Exxon is up 80% this year, meaning ETFs with exposure to that stock are benefiting from its big performance. Flows have been a different story for XLE and VDE, and not matching up with performance. The Alerian MLP ETF (AMLP ) has taken in half a billion in flows despite not matching XLE and VDE in performance.
Peeking at the 2023 Energy Outlook
“I think there is still room to run,” Morris said, expressing the belief that the energy space has yet to peak. She pointed to MLPs as still off of their peak. Looking at the broader midstream index, Morris said, “you still see a pretty discount relative to our averages.” According to Morris, the energy supply question isn’t going to just be a blip on the radar but rather a reoccurring issue. The changing dynamics between Europe and Russia, along with rising interest rates and inflation make it likely that energy is still going to work.
Pivoting to the bearish case, Morris said, “I think people are still concerned about a recession.” Lower oil demand tends to weigh on prices, and a big global economic slowdown could dampen energy’s run. Of course, OPEC could still step in to cut production and support prices.
Looking at natural gas, Morris believes, “there’s a very good story around natural gas.” She thinks the weather will play a part in pricing in the short term, as it always does, but applauded natural gas producers and providers for setting up conditions for a tight market in the long run.
Morris pointed to IEO and XOP as possible plays for investors who want to swing for the fences with energy. For downside protection that is going to be less beholden to oil prices, Morris pointed to the energy infrastructure space, with the aforementioned AMLP and the Alerian Energy Infrastructure ETF (ENFR ). Yields in these ETFs are around 7% for AMLP and 6% for ENFR right now, meaning they can also provide solid income.
ARK the Herald Angel Sings
ARK has been on a bit of a rollercoaster, but its eight ETFs, led by flagship fund the ARK Innovation ETF (ARKK ) have $13.5 billion in assets. ARK futurist Brett Winton joined Geraci to discuss ARK’s storied journey.
Going back to ARK’s early days, Winton said, “it does seem like a lot has happened over the past eight years,” noting that the firm has always been interested in disruptive technology. “We were scrappy then, and we’re scrappy now.”
After a historic rise, the performance of ARK has been less than optimal since February of last year. “We can mute our reaction to the underlining market performance. My belief is we’ve never been in a more exciting time for technology,” Winton said.
ARKK is down about 75% since February 2021. Winton says interest rates are a big factor. “History may look back at [the Fed] and wonder ‘what were they doing?’” Winton believes technology erodes inflation forces, which could lead to aggressive loosening from the Fed. “Technology allows for more effective onshoring of manufacturing,” he noted, observing that supply chains will ultimately correct themselves and also help ease the macro burdens plaguing the larger economy.
When asked if ARK will hold the line on their investment thesis, or alter it based on Fed policy, Winton reiterated that ARK intends to stay true to themselves. “What we do for our clients is provide them with concentrated exposure to disruptive innovation,” Winton said. “That’s our economic job.”
Jablonski Highlights Defiance’s Unique Offerings
With nearly a billion in assets spread between six ETFs, Defiance has started to carve out a niche. Their six ETFs are unique and they include IBIT as well as the Defiance Next Gen Connectivity ETF (FIVG ), which focuses on 5G, the quantum computing Defiance Quantum ETF (QTUM ), the Defiance Next Gen H2 ETF (HDRO ), the Defiance Hotel Airline and Cruise ETF (CRUZ ), and Defiance Digital Revolution ETF (NFTZ ). “There is this element of thematics to it, but there’s also an element of trying to create products that are… transparent, pure in their intentions in terms of what we are trying to give exposure to, and products that are going to disrupt the way we live, work, and play,” Jablonski said.
With a great wealth transfer underway, Jablonski noted that Gen X, Millennials, and Gen Z aren’t likely to want to invest in the same things their parents and grandparents have, which informs their forward-looking interests, such as quantum computing. “Advisors have to invest in themes and disruptive ETFs in areas they believe will grow,” Jablonski said, noting that there is tangible evidence that AI will be critical in the future. She thinks timing can be hard though, so it will be about parking your money and being prepared for it to be parked for a while.
Their latest product, IBIT, is the first inverse blockchain ETF. “This is actually the best-kept secret on the market right now,” Jablonski said, as IBIT launched right as the crypto world came crashing down. With the FTX scandal weighing down on the sector, IBIT is a possible hedge against companies like Coinbase, Robinhood, and MicroStrategy.
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is owned by VettaFi, which also owns the index provider for AMLP and ENFR. VettaFi is not the sponsor of AMLP and ENFR, but VettaFi’s affiliate receives an index licensing fee from the ETF sponsor.