We have had a rally in equities, and successfully traded Biotech on the way up, per our last article. Now, we will discuss another interesting opportunity for advisors. In The FRED Report, we have discussed the seasonal tendencies in oil.
This is important because oil is entering a period of seasonal weakness, where we should see some choppiness and decline into November. If it does not pull back much, this would suggest a strong yearend advance. We will discuss this in future pieces, but we may have been making a mistake in our stock selections for the oil sector.
As most readers know, the Biden Administration has stopped most drilling contracts up until now. However, we were traveling to see clients in Southern California with an associate of ours that owns a small oil company, we were surprised to learn that some drilling on Federal lands is now being approved, and more drilling is likely on the way.
Our mistake may have been to avoid the production and exploration stocks - after all, these companies would not make money if there were limits and prohibitions on production and exploration! Now, it looks like this sub-sector may be receiving a fundamental boost. Today we will look at two alternatives that are specific to production and exploration: XOP (SPDR® Oil and Gas Exploration and Production ETF) and IEO (iShares® Dow Jones Oil and Gas Exploration and Production ETF). These are interesting, and very similar charts but there are two key differences.
The first is that XOP does much more volume than IEO, which means most advisors will use this. However, IEO looks to have a much better yield, at 2.50% vs. 1.44%. It does plenty of volume unless an account is really large – advisors should look at this carefully. There is no real difference in the technical patterns of these ETFs, as you can see from the charts, below. Look at both, but my money is on IEO.