5 ETFs To Buy If Oil Stays At $40

Finally, oil jolted higher in the April 8 week to near $40/ barrel, snapping a drawn-out downtrend. The WTI crude oil ETF United States Oil Fund (USO) added about 7.5% in the last five trading sessions (as of April 8, 2016) and Brent crude oil ETF United States Brent Oil (BNO) tacked on about 8.1% gains during the same timeframe.

The impressive gains were prompted by the impending OPEC-Russia meeting in Doha on April 17 to talk about an output freeze and a decline in U.S. stockpiles. As per the U.S. Energy Department's weekly inventory release, crude stockpiles reported a surprise reduction from their all-time high levels. The report released last week showed that crude inventories fell by 4.94 million barrels for the week ending April 1, 2016, beating the expectation of a rise in inventory by 2.9 million barrels.

While many are not too hopeful about a game-changing outcome at the Doha meeting, the fact is that inventory levels are finally declining. U.S. energy firms used a lesser number of oil rigs for the third successive week to touch ‘the lowest level since November 2009’. If this is not enough, the demand scenario should improve in the days ahead on easy money policies in most developed countries.

Since, the oil patch has been under pressure since mid 2014, the time of rebalancing should approach fast. Added to this, the U.S. dollar is expected to remain benign for a few more days as the Fed is in no hurry to hike interest rates. This in turn should buoy most commodity prices including oil. 

Given the new-found optimism in the oil patch, many investors have turned bullish on the energy sector. While playing oil ETFs is always an option, there are other corners as well that are linked to the commodity oil and are likely to bounce back along with the oil price. Below we highlight five mixed ways which could be profitable if oil price hovers around the $40-level.

Leveraged Oil – Direxion Daily Energy Bull & 3x Shares (ERX)

This fund creates a triple (3x or 300%) leveraged long position in the S&P Energy Select Sector Index while charging 95 bps in fees a year. It is a popular and liquid option in the energy leveraged space with AUM of $507.6 million and average trading volume of 6.2 million shares. The ETF gained 6.8% in the last five trading days (as of April 8, 2016) and added about 6.2% on April 8 (read: An Investor's Guide to the 10 Most Popular Leveraged ETFs).

Energy E&P – SPDR S&P Oil & Gas Exploration & Production ETF (XOP)

This fund holds 60 oil and gas exploration and production stocks in its portfolio. It is well diversified across its holdings with none of the companies accounting for more than 2.25% of total assets (read: 4 Energy ETFs Outperforming on Oil Rebound).

The ETF has been able to manage $1.93 billion in its asset base. It charges 35 bps in annual fees and expenses. The product gained 5.2% in the last five trading days and was up 3.7% on April 8. It has a Zacks ETF Rank #5 (Strong Sell) (see all energy ETFs here).

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