From the December 2008 issue of Research Magazine • Subscribe!

December 1, 2008

The Season for Energy ETFs?

Who would have thought a few months ago that we would ever see gas prices below $2 per gallon? Within four months, the price of crude oil dropped from $147/barrel to below $50/barrel.

Even us crude oil sky rocketed, energy ETFs weren't able to stage significant advances. Earlier this year, oil companies struggled to pass on the rapidly rising cost of crude oil to consumers. This sounds strange as gasoline at over $4 per gallon nearly suffocated the economy, but as the price of crude oil more than doubled, the price of gasoline increased by "only" about 35 percent.

The opposite was true in the third quarter when pump prices fell more slowly than crude prices and boosted the profit margins of big, turn-key oil companies that pump oil, refine it and sell gasoline to the public. Nevertheless, energy ETFs, tipped off by falling oil prices, joined the major U.S. benchmarks in their fall. The Energy Select Sectors SPDRs (XLE) have matched the performance of the S&P 500 (SPY) and lost as much as 50 percent of their value.

Alternative energy and clean energy sectors were also dragged down along with tumbling crude prices. The PowerShares Clean Energy Portfolio (PBW) and Market Vectors Global Alternative Energy ETF (GEX) are two of the ETF that provide broad exposure to the alternative energy sector. It seems as if the motivation to pursue alternative, clean energy sources is directly correlated to the price of oil. Lower energy prices equal lower motivation.

A quick performance check shows that alternative and clean-energy ETFs are among the worst performing industry (niche) of the entire U.S. economy. With a three-year beta of 1.90, PBW is almost twice as volatile as the S&P 500.

The $50/barrel crude oil prices may serve as a springboard for oil to recoup some of its recent losses. In addition, investors that have seen year-to date losses of more than 70 percent with clean-energy ETFs are likely to see a bigger bounce in this sector when a counter trend rally ensues.

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Ron DeLegge is the San Diego-based editor of www.etfguide.com.

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