In the latest episode of Nate Geraci’s ETF Prime, by VettaFi Stacey Morris recaps energy ETFs in 2022 and looks at the energy outlook in 2023. ARK Invest Brett Winton spoke about his wild ride in recent years and offered a case for disruptive innovation stocks moving forward. Challenge ETFs Sylvia Jablonski highlighted her line of ETFs, including the Defiance Daily Short Digitizing the Economy ETF (IBIT).

The energy overview

The last time Stacey Morris was a guest on ETF Primethe SPDR Select Energy Sector Fund (XLE) it went up about 50%. Just a few months later, XLE is currently near its high for the year, up 65%. Morris put this rapid increase in context by noting that the OPEC+ meeting resulted in a cut of two million barrels per day. Oil prices saw an upward move in the lead up to and after the meeting, moving from below $80 a barrel to above $90, boosting the broader energy sector. “The most important takeaway from the OPEC+ meeting is that they are willing to step in to support oil markets, even at very high political cost,” Morris said.

The energy space also performed well overall during the third-quarter earnings season, which continued to drive energy ETFs higher. In November, the market generally improved, with the S&P rising around 6% for the month. Morris noted that energy lagged a bit and oil prices started to drop, but overall the last few months have been good for energy stocks.

Geraci extended the time frame, noting that energy has performed well despite crude oil’s trip from $120 a barrel to around $80. Morris said crude’s woes stem from a confluence of factors. She said, “A lot of what we’ve seen are concerns about the recession and what that means for oil demand. There has been a lot of concern around Chinese demand and when will China reopen and when will we see a significant improvement in Chinese demand for oil. And then you’ve had US strategic oil reserve releases, other countries are also participating in that, doing strategic releases and that’s putting more barrels on the market.” Morris also noted that exports from Russia have also been surprisingly resilient.

Despite this, energy companies are having strong years, posting good free cash flow numbers. According to Morris, “there is an important point to make and a distinction between what oil is doing and what energy stocks are doing.” Morris believes that energy stocks are not necessarily pricing what oil does. When it goes up to $120 a barrel, for example, energy stocks have largely reacted as if they were still below $80.

Broad, low-cost energy ETFs have done remarkably well. In addition to XLE, Morris noted the Vanguard Energy ETF (VDE) as another energy fund up 62%, joining XLE to outperform the iShares US Oil & Gas Exploration & Production ETF (IEO) which has risen 61% and the VanEck Oil Services ETF (OIH) which is up 59%. Interestingly, Morris singled out the largest oil and exploration ETF, the SPDR S&P Oil and Gas Exploration and Production ETF (XOP) It’s only gone up 50%. She sees this as likely due to her equal weighting scheme, as the iShares product is weighted by market capitalization.

Morris noted that Exxon is up 80% this year, meaning ETFs with exposure to that stock are benefiting from its strong performance. Streams have been a different story for XLE and VDE, and they’re no match for performance. the Alerian MLP ETF (AMLP) has received 500 million in streams despite not matching the performance of XLE and VDE.

Taking a look at the 2023 energy outlook

“I think there’s still room to run,” Morris said, expressing the belief that energy space hasn’t peaked yet. He noted that MLPs were still off their peak. Looking at the broader midstream index, Morris said, “you still see quite a bit of a discount to our averages.” According to Morris, the issue of power supply is not going to be just a blip on the radar, but a recurring problem. The changing dynamics between Europe and Russia, along with rising interest rates and inflation, make it likely that power will continue to work.

Turning to the bearish case, Morris said: “I think people are still worried about a recession.” Weaker oil demand tends to weigh on prices, and a big global economic slowdown could halt energy’s run. Of course, OPEC could still step in to cut production and support prices.

As for natural gas, Morris believes “there’s a very good story around natural gas.” She believes weather will play a role in pricing in the near term, as it always does, but she applauded natural gas producers and suppliers for setting the stage for a tight market over the long term.

Morris pointed to IEO and XOP as possible plays for investors who want to move over the fences with energy. For downside protection that will be less tied to oil prices, Morris pointed to the energy infrastructure space, with the aforementioned AMLP and the Alerian Energy Infrastructure ETF (ENFR). The returns on these ETFs are around 7% for AMLP and 6% for ENFR at the moment, which means they can provide solid income as well.

ARK the Herald Angel Sings

ARK has been on something of a roller coaster, but its eight ETFs, led by the flagship fund on ARK Innovation ETF (ARKK) they have $13.5 billion in assets. ARK futurist Brett Winton joined Geraci to discuss ARK’s storied journey.

Going back to ARK’s early days, Winton said, “it seems like a lot has happened in the last eight years,” noting that the company has always been interested in disruptive technology. “We were rudimentary then, and we are now.”

After a historic rise, ARK’s performance has been less than optimal since February of last year. “We can mute our reaction to underlying market performance. My belief is that we have never been in a more exciting time for technology,” Winton said.

ARKK is down 75% since February 2021. Winton says interest rates are a big factor. “History can look back [the Fed] and I wonder ‘what were they doing?’” Winton believes that technology erodes inflationary forces, which could lead to aggressive easing by the Federal Reserve. “Technology allows for more effective relocation of manufacturing,” he noted, noting that supply chains will ultimately be self-correcting and also help alleviate macro burdens affecting the broader economy.

When asked if ARK would stick to the line in its investment thesis, or change it based on Fed policy, Winton reiterated that ARK intends to stay true to itself. “What we do for our clients is give them concentrated exposure to disruptive innovation,” Winton said. “That is our economic work.”

Jablonski Highlights Defiance’s Unique Offerings

With nearly a billion in assets spread across six ETFs, Defiance has begun to carve out a niche. Its six ETFs are unique and include IBIT as well as the Next Generation Connectivity ETF (FIVG)which focuses on 5G, quantum computing Challenge Quantum ETF (QTUM)the Next Generation H2 ETF (HDRO)the Defiance Hotel Cruise and Airline ETF (CRUZ)Y Digital Revolution Challenge ETF (NFTZ). “There’s this thematic element, but there’s also an element of trying to create products that are… transparent, pure in their intentions in terms of what we’re trying to put across, and products that are going to alter the way we live, work and play. Jablonski said.

With a huge transfer of wealth underway, Jablonski noted that Generation X, Millennials and Generation Z are likely not to want to invest in the same things that their parents and grandparents have, which informs their future interests, such as computing. quantum. “Advisors have to invest in disruptive themes and ETFs in areas that they think will grow,” Jablonski said, noting that there is tangible evidence that AI will be critical in the future. However, she thinks that the time may be difficult, so it will be about parking her money and being prepared for it to be parked for a while.

Its latest product, IBIT, is the first reverse blockchain ETF. “This is actually the best-kept secret on the market right now,” Jablonski said, as IBIT launched just as the cryptocurrency world was crashing. With the FTX scandal weighing on the industry, IBIT is a potential hedge against the likes of Coinbase, Robinhood, and MicroStrategy.

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