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Energy , ETFs

Energy ETFs: What You Need to Know

Our Chief Energy Analyst on the two types of energy ETFs to be aware of

by Alexandra Lienhard
Updated: August 10, 2017

Steve Craig, the Editor of our Energy Pro Service, tells you about energy ETFs and explains how they let you gain exposure to energy markets without the leverage involved in futures trading.


Alexandra Lienhard: Today on ElliottWaveTV, I have Steve Craig joining me by phone. Steve is Elliot Wave International's Chief Energy Analyst and editor of EWI's Energy Pro Service. Now Steve, today I want to jump right in to cover energy ETFs because I know it's something you discuss often for your subscribers. Now what does the average investor need to know about energy ETFs.

Steve Craig: For starters, there are two types of energy ETFs, Alex, that investors should be aware of. Those comprised of equities like the Energy Select Sector SPDR, the symbol is the XLE, and those that consist of futures contracts like the USO and the UNG. Perhaps the biggest appeal for a commodity ETFs is that investors can gain the exposure without the leverage involved with futures trading. As for the XLE, and really, for that matter, energy equities in general, they're going to have a strong tendency to trend up and down with the price of oil since it's a major revenue source. The relationship is easy to see from a longer-term perspective. But it's not perfect. Note the period in here where the XLE extended its advance into record territory, while the futures languish below their 2011 peak. And they came nowhere near their 2008 record high. Still, there's no denying a strong similarity between the two price charts. As for the ETFs like the USO and UNG, they're comprised of futures contracts. So the relationship between the ETF and the price of the commodity is much tighter. Even so, there are some noticeable discrepancies between the two price charts.

AL: Now do the wave count and trend trajectory on energy ETFs always line up with the underlying?

SC: Percentage wise, the day to day price changes are seldom identical and periods of contango and backwardation can be a factor since the fund managers sell the expiring futures contract ahead of the last trading day, and then simultaneously purchase the next contract month. This can add up over time, leaving the price charts with a different look. For example, notice that percentage wise the USO has retraced over 3/4 of its advance from the 2016 low through the 2017 high. In contrast, the futures retraced well under half of its comparable advance. The USO and UNG also have a shorter trading day than the futures — 6 and 1/2 hours versus a 23-hour day for the futures. This can result not only in high and low price extremes falling on different days but sometimes the futures will complete a wave pattern when the USO is closed, leaving it looking incomplete.

AL: Now Steve, which leads -- the ETF or the underlying? And does that leadership hold up on all time frames from intraday to longer-term charts?

SC: The time frame is irrelevant since USO and UNG are comprised of futures contracts. They aren't going anywhere without the futures leading the way. This makes it critically important to analyze ETFs right along with the underlying futures, which I lean on for guidance every day.

AL: And looking ahead, which ETFs have the best opportunities or cleanest wave counts over the next month or two?

SC: It's natural gas at this juncture, Alex. It looks to be in the initial stages of a sizable third wave decline.

AL: Thanks for talking today offering these insights, Steve.

SC: Sure, it's always a pleasure.

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