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ETF News And Commentary

The geopolitical tensions between the east and the west escalated quite significantly following Russia’s takeover of Crimea. Fears about Russia capturing other parts of Ukraine as well had sent jitters among investors. 
 
Both the U.S. and Europe have levied a host of sanctions on Russia for what they see as Russia’s invasion of Ukraine. Though this has adversely weighed on the performance of the equity markets, the crisis came as a blessing in disguise for some commodities.
 
Among others, oil and natural gas turned out to be the biggest beneficiaries considering the fact that Russia is a huge supplier of the world’s natural gas and energy needs. Moreover, Europe imports around 30% of its natural gas from Russia, making the region heavily dependent on Russian production to support their economy.
 
Supply outages in Nigeria and Libya also contributed to the rise in crude oil prices. The U.S. Energy Information Administration report of falling crude stockpiles in Cushing, OK further supported the upward momentum in crude (read: 3 Energy ETFs to Buy on the Ukraine Crisis).
 
Apart from these factors, signs of recovery in the U.S. economy raised fears of greater demand ahead, given the further boost in oil prices last week. The Bureau of Economic Analysis raised its economic growth estimate for the final quarter of 2013 to 2.6% from the second estimate that pegged GDP growth at 2.4%. 
 
Also, better-than-expected orders for U.S. durable goods for the month of February suggested robust U.S. consumer spending ahead.
 
Market Impact
 
These factors jointly contributed to the spike in oil spot prices last week, which rose 2.09% to close at $101.63 per barrel. Moreover, natural gas spot price spiked up 3.92% last week to close at $4.48 per cubic foot (read: 3 Oil ETFs Stand Out on Russian Tensions).
 
The boost in prices of oil and natural gas served to benefit energy ETFs as well. Energy ETFs saw a huge surge in inflows, with investors anticipating this sector to gain momentum in the near future.
 
In fact, energy ETFs were the best performers last week in the domestic market, with all the top 5 gainers being energy funds.  Below we have highlighted 3 energy ETFs that have soared the most in the past week:
 
ISE-Revere Natural Gas Index Fund ((FCG - ETF report))
 
Launched in 2007, FCG focuses on companies involved in the exploration and production of natural gas and tracks the ISE-REVERE Natural Gas Index for this purpose.
 
The fund holds only U.S. listed companies and chooses stocks based on four different factors including price/earnings ratio, price/book ratio, return on equity and the correlation to natural gas futures prices (see all the Energy ETFs here).
 
As a result of this focus, this equal-weight fund holds a basket of 30 stocks. Penn Virginia Corporation, Stone Energy Corporation and Comstock Resources, Inc. are the top three holdings of the fund.
 
The fund has gained 3.76% in the past one week and is up 4.86% in the past one month.
 
S&P SmallCap Energy Portfolio ((PSCE - ETF report))
 
This fund too focuses on the U.S. market, giving investors exposure to stocks of U.S. energy companies. This relatively unpopular fund tracks the S&P SmallCap 600 Capped Energy Index having amassed $51 million since its inception.
 
Half of the 30 energy stocks that the fund holds belong to the energy equipment & services industry, followed by exploration/production (37%) and coal/alternative energy (7%) rounding out the top three.
 
The fund has added 3.36% during the last one week and 5.56% in the past one month.
 
Market Vectors Oil Services ETF ((OIH - ETF report))
 
This passively managed fund seeks to deliver the return of the largest publicly traded oil services companies in the U.S. equity markets.
 
The fund holds a basket of 26 stocks with Schlumberger Ltd (20.52%), Halliburton Co (11.92%) and National Oilwell Varco Inc. (7.94%) being the top three holdings.
 
The fund charges 35 basis points as fees and has returned 3.35% in the past one week.
 
Bottom Line
 
Though oil prices spiked last week on tensions in Ukraine and positive economic data, they fell slightly during recent trading sessions. Investors booked some gains on the news that top diplomats from the U.S. and Russia are expected to find a solution for the existing crisis in Ukraine (see A Comprehensive Guide to Oil & Gas ETFs).
 
However, if the parties fail to reach a solution, the crisis might escalate further, thereby disrupting supplies and acting in favor of the above mentioned funds once more.
 
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