Diversified Energy Exposure: Top Trade Opportunities

A major oil ETF, XOP (SPDR S&P Oil & Gas Exploration & Production ETF), has gained 25% since mid-February and 135 percent since 2021. (shown below). Similarly, the biggest energy ETF by market value, XLE (Energy Select Sector SPDR ETF), which has majority sector exposure from Oil, Gas & Consumable Fuels, has gained by 14% since mid-February and 107 percent since 2021.

This year's energy bull market has been extraordinary, with energy assets outperforming the entire market by a wide margin. The long-term performance of these instruments, on the other hand, has been rather flat. Since 2017, XLE and XOP, for example, have grown by 3% and -18%, respectively.

For investors, especially volatility traders, the current, turbulent situation of the energy industry gives an intriguing opportunity. Traditional energy instruments' negative long-term performance, combined with their significant concentration on two politicized commodities, calls for a more diversified strategy to energy exposure. 

With the expanding popularity of electric cars, rising global computing needs, and major countries renovating their energy infrastructure, there may be longer-term concern about the health of the energy market. Clean energy stocks and ETFs are one method to obtain exposure to energy while also diversifying against the oil-and-gas-specific issues that have a large influence on the wider energy market.

While many renewable energy assets are still too volatile for active retail traders, a few have seen significant development in recent years. Plug Power (PLUG), a hydrogen fuel cell firm, and ICLN (iShares Global Clean Energy ETF), which invests in global clean energy shares, are two instances of very liquid companies. 

Brookfield Renewable Partners (BEP), which owns and runs renewable generating assets, and TAN (Invesco Solar ETF), which invests in global solar energy firms, are two less liquid (but still tradable) examples. Since 2017, the clean energy ETFs, ICLN and TAN, have outperformed the oil and gas ETFs by 164 percent and 344 percent, respectively, compared to the oil and gas ETFs.

Clean energy ETF assets have been generally uncorrelated with the big energy ETFs in recent months, providing exposure to energy as well as diversification versus conventional energy assets.

As of March 25, indicated volatilities for XLE, 48 percent for XOP, 43 percent for ICLN, and 49 percent for TAN were 36 percent, 48 percent, 43 percent, and 49 percent, respectively, for several energy assets (compared to 22 percent for SPY). Throughout Q2 of 2022, keep an eye on energy assets, and combining conventional energy assets with clean energy assets is a good strategy to have a more diversified energy exposure.