Energy ETFs in focus as global conflicts unsettle oil markets

The wars in Ukraine and Gaza may not immediately affect energy stock prices if history is an indicator

Rob Isbitts

Oil jacks markets

War, what is it good for? “Absolutely nothing,” said the iconic 1970 song by Edwin Starr. Back then it was Vietnam, and today it is Ukraine, Israel-Hamas and many other geopolitical hot spots. Investors know that blocking out wars' human tragedy is difficult. 

However, one area of the markets that tends to get intriguing when war or the threat of it exists, especially when it involves the countries in conflict, is oil.

Specifically, ETFs tied to oil or energy stocks tend to attract more eyeballs at these times. Yet oil’s price is fickle, and for the market to get in sync with realities on the ground can take a long time.

At other times, oil can rally or crash faster than it takes to say Organisation of Petroleum Exporting Countries (OPEC).

So as 2024 begins with one long-tenured war (Ukraine-Russia) and another on the verge of expanding to multiple fronts (Israel-Hamas-Hezbollah), the fact the Brent Crude prices are again at a familiar resting spot makes this a time for investors to pay attention.

There are many energy ETFs but here are a few that may track how events are impacting oil and related ETFs.

Energy ETFs come in many forms 

The WisdomTree Brent Crude Oil ETC (BRNT), which has $1.6bn assets under management (AUM), tracks the price of that closely followed oil price.

BRNT synthetically replicates Bloomberg Brent Crude Subindex Total Return which is designed to reflect the movement in the price of the Brent Crude futures contracts that continuously roll on a pre-determined schedule.

Brent Crude was sitting around $78 last Friday, down from its 2023 high of about $95 but about the same as last year’s bottom level in May. So technicians may see a “double bottom” formation.

These patterns can historically lead to additional increases but have more recently petered out. Since the start of 2022, Brent Crude has bottomed in this area several times, but each of the subsequent rallies was limited in price, time or both.

For investors who prefer to invest in stocks, but seek to benefit from a potential oil rally, ETFs such as the $1.1bn Xtrackers MSCI World Energy UCITS ETF (XDW0) are an option for fund selectors.

XDW0 and other ETFs that focus on various segments of the energy stock space are starting to move higher. However, investors should be cautious as rising energy prices in a dour stock market may not deliver returns as expected.

Oil is volatile which is like saying grass is green and water is wet. That will not change. But what has changed is that ETFs provide many choices for investors to express themselves on oil and energy stocks.

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