Energy stocks are signaling an ‘obvious bottom call,’ ETF strategist says

VettaFi Financial Futurist David Nadig joins Yahoo Finance Live to discuss energy markets ahead of recession fears and fluctuating oil prices, energy ETFs, decarbonization, commodity ETFs, and ESG funds for Gen Z investors.

Video Transcript

RACHELLE AKUFFO: Well, we're moving on here to oil futures, which actually moved lower on Wednesday over ongoing worries about an economic recession, leaving investors to wonder whether buying energy ETFs is a wise decision. Let's bring in Dave Nadig there, VettaFi financial futurist, as part of our ETF Report, sponsored by Invesco QQQ. So help us make the case here. Why is it still a good time to invest in energy ETFs?

DAVE NADIG: Well, they say that the cure for high prices is high prices. And I think we're seeing a bit of that now. I mean, I don't think anybody expected oil to go, say, from 100 to 200 and then sit there. So I think it's natural that we're having a bit of a pullback. I mean, we have to remember, energy inputs are always going to be cyclical with the economy. When people think the economy is doing well, oil tends to run up. When people think we're headed for a recession, which is clearly the trade we've seen for the last month, oil tends to come down.

But if we actually dig under the hood a little bit and think about the actual companies here, I think funds like XLE, which is the big sort of bellwether fund in the energy space, it's sitting now at four-month lows. It's a bit of an obvious bottom call to say now-- and I'm not a big fan of trying to time the market specifically, but I think we should point out that energy companies are actually pretty disciplined. I think that's the right word. They're returning cash to investors through dividends, through buybacks. They're not just chasing short-term oil prices.

The headlines may scream at companies to just go pump more, but honestly, we don't want huge swaths of investment chasing short-term price swings. That leads to even worse bust cycle. So I think focusing on some of those energy companies that are putting out pretty good yields right now is at least a good place to start. I wouldn't be eschewing energy entirely out of your portfolio. We're going to be in the midst of a major energy transition for the rest of my lifetime. And the big oil companies are going to be a big part of that.

JARED BLIKRE: And what about some of the other areas, maybe some of the more fringe ETFs, some of the explorers? I know we're heading-- we're talking about recession. So maybe we're not going to have a lot of oil producers or explorers out there trying to dig new wells right now. But is there some opportunity in some of these other spaces?

DAVE NADIG: Yeah, I mean, one that I'll point out is energy infrastructure. I think it's worth pointing out that the United States has now become, on a net basis, energy independent. But what that means is, we have to move energy around a lot to achieve that independence, right? We take crude from Canada. We refine it into products, but then we export some of that. We import different grades of crude that we need. That transportation infrastructure, you can go after in two ways.

A common way to do that is through the MLP space. AMLP would be the ticker there. I should point out VettaFi provides the index under that. So I don't want to be seeming too self-serving there. But they're really attractive yields in the AMLP space. They're actually over their 10-year long-term average of what you can get out of that space. Or you can get a broader play with something like ENFR, which is a broad energy infrastructure play. Both of those, I think, are interesting ways to play it.

And last, if you are kind of anti the oil sector, you might want to consider carbon. Kraneshares, KRBN, has been on fire. It's pulled in over a billion dollars over the last year. It's definitely the bellwether in that space. And that's really investing in the carbon cap and trade market. It tends to actually move a little counter to energy sometimes, but it really does seem to have its own market dynamics. Importantly, folks like Exxon are some of the biggest players in that. So you're not actually eschewing oil altogether. You're going to actually be investing in those folks that are most caught up in the transition to a net zero world, which includes some of those oil companies.

RACHELLE AKUFFO: And as you mentioned, in this transition, obviously, it's going to take several years to happen, but how should people really think about investing in energy ETFs, as we begin to make that transition, since we're not there yet?

DAVE NADIG: Well, I think some investors are of this idea that because we're going to have to move away from oil, that means we should just be selling oil all the time, right? Because clearly, that must go down. I actually think that's a bit of a mistake. I think we're going to have political and social environments that push people away from investing too heavily in petroleum fuels in favor of alternatives. We've already seen that, right? We've been talking about Tesla and electric vehicles and solar energy. And that's fantastic.

But the energy companies themselves are the ones that are going to have to wean us off this very product through things like carbon capture. Exxon, as I mentioned, is one of the biggest players in the carbon capture space. Now, some of that's still a decade off before it's really putting a dent in things. But I think it's smart to think about the whole picture. Just simply focusing on one fuel source is not really how to think about the global economic environment.

JARED BLIKRE: And we've been talking about energy broadly here, but the commodity sector has seen some huge moves to the downside. I think natural gas is off 40%, some big moves in the grains and cotton as well. Any other ETFs you're looking to potentially participate in an upswing or maybe more downside?

DAVE NADIG: Yeah, I mean, we have seen a lot of interest in broad-based commodities exposure. PDBC seems to be the go-to for a lot of investors there. That's a broad basket of multiple commodities, from agriculture to energy, to even a little prescience in industrial metals. I point out that a lot of that stuff is very much responsive to the economic cycle. So if you believe we're headed into a recession and that it's going to have any teeth, you should probably not be super bullish on commodities, particularly in China.

China is really the canary in the coal mine for what's going to happen to things like copper, certainly in the iron ore market, the aluminum market, definitely in the energy space as well. And if we see significant closures, again, for COVID reasons in China, if we see signs of some of the economic growth story there really cracking, as we head into the Communist Party meetings towards the end of this year, I would be a little bit cautious of commodities.

So I don't think now is necessarily the right time to be trying to call a bottom. We just had a run-up in commodities based on what we saw over the last year. I think a little bit of pullback is natural. But I'm not inclined to think you want to be buying into a recession in the broad commodity space.

RACHELLE AKUFFO: And I want to ask you about ESG investing. We're obviously seeing some of the younger generations, millennials, Gen Z, who, they want to do a lot of this more ethical investing, but we're starting to see some of these large institutional investors either sort of plateauing, perhaps cooling a little bit. What are you seeing in that space? And is this a temporary thing? Or do you expect it to pick back up?

DAVE NADIG: Well, actually, the evidence would suggest that institutions, which are really the drivers of the assets in the ESG space, they don't seem to be slowing down. We don't see any announcements from, say, Nordic Pension Fund saying that they're pulling out of their ESG investments. Roughly, about a quarter of the equity market right now, in one capacity or another, is actually tied to some sort of ESG mandate, most of it from the institutional level.

What we have seen is a pullback in interest from the average retail investor. I think that's completely understandable. We see pullback from anything noncore any time we have a sustained market downturn, which I think we can start saying that we've had here so far. I don't like to use the word bear market, but clearly, in a downturn like this, making those non-economic choices to, say, be in an ESG fund versus a broader fund for a non-economic reason, your own personal belief system, that can be a tricky thing to do while you're watching your portfolio go down.

I think that that's going to be a very temporary thing. And I think you're going to see the institutional market remain as strong as ever. At VettaFi, we did a survey just a couple of weeks ago, which suggested a third of the polled advisors were still planning on adding to their ESG allocations over the coming year.