The crash in oil prices has truly reached shocking levels at this point. Oil prices which were trading above the triple-digit mark only months ago, but have now given up gains to gravitational forces and are now hovering around the five-year low of $65 a barrel.
Oil has collapsed more than 40% this year, thanks to sluggish global demand, a strong dollar and booming U.S. oil production – which has risen to the highest output from the U.S. in three decades. Moreover, a lack of geopolitical concerns has also dragged oil prices lower.
While these factors were certainly playing foul in the oil market, the recent decision by the Organization of Petroleum Exporting Countries (OPEC) not to cut oil production in spite of overflowing supplies has led to a bear market.
In fact, OPEC members like Saudi Arabia and Iraq have widened discounts on crude exports to some of their customers, bolstering speculation of a price war, given the OPEC’s clear strategy of maintaining its dominance in the market in the face of increasing shale oil production in the U.S.
While the slump in oil prices is definitely hitting oil exporting nations and several oil companies, which in turn have even announced cuts in their capex budgets, it has been a blessing in disguise for several others. Lower oil prices normally help companies either by way of lower input costs or increased consumer spending or through both.
Indeed, wilting oil prices can have a multiplier effect on the economy and benefit a range of sectors.
Below we have highlighted three sector ETFs that should thrive on low oil prices.
Retail – SPDR S&P Retail ETF (NYSEARCA:XRT)
Lower gasoline prices are good news for retailers as consumers will now have fatter wallets and more money for discretionary spending. This is likely to lure customers for shopping especially prior to the busiest holiday season and in turn benefit retailers.
XRT is one of the most popular ETFs in its space with an asset base of $1 billion and trades with heavy volumes of nearly 2.3 billion shares. This product tracks the S&P Retail Select Industry Index, holding 103 securities in its basket. It is widely spread across each component as none of these holds more than 1.27% of total assets.
In terms of sector holdings, apparel retail takes the top spot at one-fourth share while specialty stores, automotive retail and Internet retail also have double-digit allocations. The ETF charges 35 bps in annual fees and has added over 7.9% in the past 26 weeks. The fund has a Zacks ETF Rank of 2 or ‘Buy’ rating with a Medium risk outlook.
Transportation Sector – SPDR S&P Transportation ETF (NYSEARCA:XTN)
Though retailers are definitely going to benefit from oil gasoline prices, the transportation sector is best positioned to take advantage of the falling crude. This is especially true as energy costs form a major portion of the overall costs of this sector and as such falling oil prices are likely to boost earnings of airlines and shipping companies.
This fund uses the equal weight methodology to each security by tracking the S&P Transportation Select Industry Index. Holding 49 stocks in its basket with an AUM of $509.3 million, each security accounts for less than 3.4% of total assets.