ETF of the Week: SPDR S&P Oil and Gas (XOP)

Lydon opens by acknowledging the division between advisors and analysts on how to approach the energy sector and whether it’s a good time to buy in or not, but says that at the end of the day, gas prices and oil prices continue to go up on average, particularly due to the Russia-Ukraine war.

“With the tension that we’ve got over in Ukraine and Russia and the fact that Russia produces 10% of the global oil supply, it is going to affect the supply chain, especially over in Europe,” Lydon says.

Current administrative regulations from the White House that focused on environmental impacts have meant a reduction of the number of oil wells and pipelines for the U.S. With demand for gas expected to increase over the coming summer months in the U.S., price pressures on both oil and gas are anticipated to grow as well.

“The S&P 500 today does not have a huge allocation to energy where it did 10 years ago, it makes up almost 17% of the S&P 500, it makes a lot of sense that if you want to hedge against higher energy prices and you want to look in areas that are in up-trends, which you and I talk about all the time, XOP is one of those ETFs to consider,” Lydon discusses.

For advisors who are concerned about the impacts that a Ukraine resolution would have on the price of oil and the fund, Lydon explains that there continues to be greater demand than there is supply, even if Russia were to begin producing and exporting again. With many countries working to pivot away from Russian oil and natural gas permanently, it will put greater demand on supply elsewhere.

The entire situation provides a buying opportunity for investors, particularly faced with upcoming summer months in the U.S. where gas and oil prices rise naturally anyway.

“As we get into the fall again after a pretty hot summer, we may see an extended period of time where commodity prices in general remain high, and if you feel that that’s the case regardless, consider an ETF like this,” Lydon says. “Consider using the 200-day average, consider some allocation to commodities because even though you think you have it, if you’re allocated to high correlated ETFs and mutual funds in the S&P 500, you don’t have a proper allocation.”

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