During his State of the Union address, President Joe Biden noted that the U.S. will still need oil and gas for at least another decade. This comes as the President has pushed for a significant transition in our country to renewable energy.
President Biden has fought against the oil and gas companies since the beginning of his tenure. He has told Americans that we need to reduce our reliance on oil and gas and move towards renewable energy as soon as possible.
The President has pushed for legislation to make renewable energy more affordable. All this while telling oil and gas companies that they need to invest more to grow supply but not offer them the same concessions.
More so, the Biden administration has tried to reduce the number of oil and gas leases the federal government can sell. Thus making it more difficult to increase supply. Some government policies are also making the industry smaller since new and smaller companies are getting squeezed out due to regulations.
I think most people would agree that burning oil and gas is not ideal for the environment and more so that we need to reduce our reliance on foreign oil and gas producers such as Russia (which we primarily have done since the start of the war with Ukraine) and those countries in the middle east that are not so friendly to the U.S.
However, it will be more than even the decade President Biden admitted to in the State of the Union address until we are indeed off the oil and gas addiction our country currently has.
For example, even the most aggressive state legislation coming out of California and New York doesn't ban the sale of internal combustion engines until 2035, more than a decade from now. While electric vehicle sales rapidly increase in the U.S., they are growing from a super low starting point.
The reality is that the government is making it more difficult for oil and gas companies to expand supply either with laws, not selling leases, or banning gasoline vehicles in the future, making long-term investments less appealing. This inadvertently pushes oil and gas prices higher and makes these companies more profitable.
And remember, this is all during a time when the President, a Democrat, is not 'pro' oil and gas. Take a moment to imagine how well the industry could be doing if the President and Congress were both 'pro' or even indifferent about the oil and gas industry.
So with that being said, let's look at a few exchange-traded funds that you can buy today to possibly play the boom the oil and gas industry may be setting up for over the next few decades.
First, we have the U.S. energy ETF by market cap, the Energy Select Sector SPDR Fund (XLE). XLE has $40.8 billion in assets under management, almost four times that of any other energy-specific focused ETF.
This fund offers excellent liquidity to a market-like basket of U.S. energy companies. The market-like aspect of the fund is crucial because this means the fund essentially only holds the big players in the industry. XLE has been trading since 1998, with an expense ratio of just 0.10%, 25 holdings, and a distribution yield of 3.55%. XLE is up 3.44% year-to-date, 47.9% over the last year, and 8.72% annualized over the previous five years.
Next, we have the iShares U.S. Energy ETF (IYE). IYE has existed since 2000, has $1.88 billion in assets under management, and pays out a 3.27% yield. It tracks a market-cap-weighted index of large-cap U.S. energy companies.
This is different from XLE because IYE owns 43 companies, not just 25 and is not limited to trying to build a 'market-like' ETF but just owning the market. Year-to-date, the fund is up 3.12%, 47.04% over the last year, and 7.25% annualized over the previous five years. The biggest downside to IYE is the expense ratio of 0.39%, much higher than XLE's.
There is always the more refined oil and gas ETF (did you catch that), such as the SPDR S&P Oil & Gas Exploration & Production ETF (XOP).
These ETFs will only own the exploration and production companies, as opposed to any company operating in the oil and gas industry. XOP has an expense ratio of 0.35%, $3.94 billion in assets under management, 61 holdings, and a yield of 2.37%. XOP has a weighted average market cap of just $36 billion compared to XLEs' $206 billion and IYE's $194 billion.
This means XOP is holding much smaller companies than the other two funds. That can be both a good and bad thing. Historically, XOP has performed alright but not great as the fund is up 4.28% year-to-date, 39.3% over the last year, but just 0.13% annualized during the previous five years.
Finally, we have the leveraged options; the ProShares Ultra Oil & Gas ETF (DIG) and MicroSectors U.S. Big Oil Index 3X Leveraged ETN (NRGU).
Dig is a two-times leveraged fund, while NRGU is a three-times leveraged fund. These funds will give you excellent upside exposure to the oil and gas industry since they are leveraged. Still, they can also deteriorate very quickly if the oil and gas industry experiences a downturn.
I believe the oil and gas industry was the tobacco industry during the 1960s. Many people thought the tobacco industry would disappear due to the adverse health effects of the products they were selling, however, here we are 50 years later, and the tobacco stocks are still going strong.
As much as I want an electric vehicle and hate going to the gas station, I don't see myself, let alone the whole U.S., squashing our oil addiction even over the next two decades.
Matt Thalman
INO.com Contributor
Follow me on Twitter @mthalman5513
Disclosure: This contributor did not hold a position in any investment mentioned above at the time this blog post was published. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.
