There are many instances when an energy exchange-traded fund (ETF) and exchange-traded notes (ETNs) can come in handy...
You can use them to play commodities like oil and natural gas without actually buying commodity contracts.
You can use them to play individual sectors without having to put all your chips on one company.
And you can use them to hedge against macroeconomic events like inflation and bear markets by quickly going short without actually shorting.
The selection of energy ETFs available seems to grow every week, so here's a partial rundown of your options and when to use them.
Energy Commodity ETFs and ETNs
PowerShares DB Energy (NYSE: DBE) – Splits its assets between West Texas Intermediate (WTI) crude, gasoline, Brent crude, heating oil, and natural gas
iPath S&P GSCI Crude Oil (NYSE: OIL) – Tracks the return of WTI
iPath Dow Jones-UBS Commodity Sub-index Total Return (NYSE: JJE) – Tracks the return of crude oil, heating oil, natural gas, and unleaded gasoline
United States Gasoline (NYSE: UGA) – Tracks the movement of gasoline prices
United State Natural Gas (NYSE: UNG) – Tracks the return of natural gas futures
Short Energy Commodity ETFs and ETNs
PowerShares DB Crude Oil Short (NYSE: SZO) – Short oil
United States Short Oil (NYSE: DNO) – Short oil
ProShares UltraShort DJ-UBS Natural Gas (NYSE: KOLD) – Short natural gas
Broad-based Energy ETFs and ETNs
PowerShares Global Clean Energy (NYSE: PBD) – Basket of international solar, wind, geothermal, and grid players
First Trust Global Wind Energy (NYSE: FAN) – Basket of international wind players
Guggenheim Solar (NYSE: TAN) – Basket of international solar players
Leveraged Energy ETFs and ETNs
ProShares Ultra DJ-UBS Crude Oil (NYSE: UCO) – Twice the daily return of oil
ProShares UltraShort DJ-UBS Crude Oil (NYSE: SCO) – Negative 2x the daily return of oil
ProShares UltraShort DJ-UBS Natural Gas (NYSE: KOLD) Negative 2x the daily return of natural gas
How to Use Them
That list could easily be twice that size, because so many brands offer the same thing...
Among ProShares, PowerShares, iPath, Direxion, and Market Vectors, you're bound to find duplicate offerings for the same sector or investment strategy.
Brand doesn't really matter to me; I'm more interested in the funds' objective.
For example, in the annual run-up of oil and gas prices in spring and summer, I'm usually in a long oil or gasoline fund.
If corporate earnings are bad or other signs of recession are popping up, you can get on the short side to capitalize on the commodity sell-off that always follows bearish macro news...
Or you can use them to play Fed announcements and other economic factors.
Commodities usually rise during inflationary periods, so use an ETF to get long commodities the next time Ben says he's printing more money.
I love ETFs because they can be used to play like a hedge fund manager without having to get your hands dirty in actual commodities contracts or the physical shorting of stocks.
In other words, they allow you to act on ideas and deploy complex strategies usually reserved for the Wall Street elite... just by buying a single security.
Use them often to diversify your energy investment approach and increase your success.
Energy ETFs originally appeared in Energy and Capital. Energy and Capital, a free 3x-per-week newsletter, offers practical investment analysis in the new energy economy.
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