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|Thematic vs thesis driven investing in oil||Roessing, C and Freedman, S. For the thematic approach to achieve positive impact, however, fundamental, primary research is vital - not least because the process requires classifying economic activities according to their capacity to bring about positive ecological or societal change. Yet, the clean tech experience is more nuanced than often presented, as discussed in the sidebar. Cost Declines in Information Technology. Company impact.|
|Thematic vs thesis driven investing in oil||817|
Not only will the sector need to meet that growing demand, but it must do so as production from legacy fields continues declining. For perspective, that's more than the current production of the world's top three producers -- the U. Russia, and Saudi Arabia -- combined. That outlook suggests that oil prices need to be high enough in the future to incentivize oil companies to continue exploring for and developing new sources of oil, which should benefit oil stocks as a whole.
Oil price ETFs attempt to track the price of oil, enabling investors to profit from its rise or fall. We'll drill down a bit deeper into this ETF later. A broad market ETF, on the other hand, invests in a large basket of energy stocks, including upstream, midstream, and downstream companies, as well as integrated oil companies that operate across the sector. Broad market oil ETFs typically hold more than oil stocks across the industry, which allows investors to benefit from the anticipated growth in all segments of the oil market.
The final type of oil ETF targets one of the three main segments of the oil industry: upstream, midstream, and downstream. The upstream segment focuses on exploring for, drilling, and producing oil. The oil and gas midstream sector , in the meantime, focuses on transporting, processing, storing, and marketing hydrocarbons, which include oil, natural gas, natural gas liquids NGLs , and refined petroleum products such as gasoline and diesel.
Finally, the downstream segment focuses on transforming oil, natural gas, and NGLs into higher-valued products like gasoline as well as the building blocks for petrochemicals. Sector-specific ETFs allow investors to target an investment that should be profitable if a particular thesis plays out.
For example, if an investor believes that higher oil prices will drive a rebound in drilling activities -- and therefore fuel higher profits for oil-field service companies, pushing up their stocks up in the process -- then they can express this view by investing in an ETF focused on this oil-field service stocks. That targeted yet broad-based approach will avoid a situation where the thesis plays out as anticipated with most oil-field service stocks rising, except for an investor's chosen company, which underperforms its peers because of some unexpected issue.
With so many oil ETFs out there, investors face a daunting task in picking the best one for their portfolio. One way to narrow the field is by looking for the following three criteria:. Dozens of ETFs hold oil stocks, giving investors a wide variety of options.
The largest by assets under management are on the following table:. North American natural resources companies, including oil, and gas, mining, and forestry companies. Data source: Company websites. Note: Assets under management as of Jan. To give investors a flavor of the differences between these funds, we'll drill down into the four largest. Furthermore, it is a market cap -weighted ETF, meaning that the largest companies by stock market value make up the greatest percentage of its holdings.
This allocation strategy differs from an equal-weight ETF, which invests roughly the same portion of its funds into each stock. So while this ETF provides investors with broad diversification across the oil sector, it does so via the largest oil and gas companies. That leaves it highly concentrated toward the top end. In early , for example, this ETF's 10 largest holdings made up While that percentage will fluctuate along with the stock prices of its largest holdings, this ETF, like others weighted by market cap, means investors will have much more exposure to the largest stocks.
One positive benefit of this concentration is that larger oil companies are less volatile than smaller ones, which can help cushion the blow when crude prices fall, as they did in late On the downside, if one of its largest holdings underperformed, it would be a significant drag on this fund's returns compared to a similar equal-weighted oil ETF. However, it's also a market cap-weighted ETF, meaning the largest percentage of its assets are in the biggest energy companies by market cap.
Aside from offering a bit more diversification across the sector, another thing setting this ETF apart from most others is its ultra-low expense ratio. Fees are noteworthy because they eat into returns over time. That's why investors should seek out lower-cost funds like the Vanguard Energy ETF, which should enable them to earn a better total return than a similar ETF with higher fees. This ETF is an ideal option for investors who want to target the fast-growing U. Because it's not concentrated on the largest oil producers, which tend to grow at a slower rate, investors have more upside potential with this ETF.
However, with that greater reward comes a higher risk level since this ETF will likely be much more volatile than others, which could hurt returns when oil prices slump. Instead of investing in oil stocks, this fund buys oil futures contracts specifically on the U. These contracts set the market price for oil. Because it invests in oil futures contracts, the United States Oil Fund enables investors to track the daily movements of the price of oil.
So, it allows investors who believe that oil will go higher in the near term to potentially profit from that view without having to open a commodity futures account. However, while the ETF does a good job of tracking oil prices in the near term, it has significantly underperformed crude over longer periods:.
USO data by YCharts. Several factors caused this drag. First of all, the fund has a much higher expense ratio than most other ETFs, which eats into returns over time. Second, oil futures expire every month, which adds trading costs since the fund needs to continue rolling its contracts forward by selling them just before expiration and buying new ones that expire at a later date. Third, those front-month contracts it's selling tend to trade at a lower price than those expiring in future months a situation known as contango , which often forces this ETF to pay up to roll contracts forward.
Because of these factors, investors shouldn't use the United States Oil Fund as a long-term investment on the price of oil but instead to make short-term wagers on movements in the market. Those bets can either be bullish by buying the ETF or bearish by shorting it, which an investor can do by borrowing shares of the fund from a broker and selling them in hopes of buying them back later at a lower price after crude prices fall.
The price of oil has a significant impact on the performance of oil ETFs. Oil ETFs, however, significantly underperformed the market -- as well as many top-tier oil stocks -- over the next five years because of subsequent oil price crashes in late and late Thus, investors do need to pick the right time to buy, so that they get the most out of an oil ETF. We often hear things like electric vehicles are the future, or that the renewable energy sector will have substantial growth.
When it comes to investing though, there may be multiple companies that match our belief and we may find it challenging to pick a stock within that sector to invest in. If you have been in such a situation, thematic investing may be the answer. Thematic investing is an investing method where you identify significant opportunities or invest in popular trends without extensive research on individual stocks. For instance, if you believe electric vehicles will have a strong growth in the coming years, you can choose to invest in a theme designed explicitly with that view.
Most investors do not have efficient equity portfolios despite having the right investment approach because of the lack of expertise and time. Thematic investing may solve this problem and allows you to invest in different and specialized sectors that can offer concentrated exposure in line with your beliefs.
Even though thematic investing reduces the effort required to select individual companies, it is prudent to study and research the theme you are interested in and benchmark its risk and performance against the market. For your thematic investment strategy, you may choose to create a portfolio manually or select from the many thematic investment ETFs.
You can choose to invest in themes that echo your beliefs or select innovative trends that are gaining popularity. Even broader sectors like Emerging Markets also fall under thematic investments. As a first step you filter out the themes that interest you.
Research different themes and sectors, compare and benchmark them against other asset classes. While benchmarking, make sure you also compare the risk volatility of the theme against the market. You can then proceed to configure the portfolio as per your preferences and risk profile.
However, depending on your risk appetite, you may shuffle around and customize your portfolio. It is common to rebalance your portfolio periodically to generate optimum returns and balance risk. As the constituent performance diverges, you should update your portfolio to align the weights to the initial strategy.
The idea is to ensure that the stock portfolio always tracks the underlying theme. You may also get exposure to thematic investments through ETFs that invest in a particular theme or sector. There is less flexibility on the flip side, and you cannot remove a stock that you may not like. One of the strengths of thematic investing is that it is much more concentrated compared to passive or regular fund strategies. For example, mutual funds typically invest in stocks in a portfolio and the focus is on portfolio diversification meaning returns are compromised for keeping a lower risk.
Thematic investing focuses on a smaller pool of stocks to capture future trends and capitalize on potential growth. Selecting a few companies involved in renewable energy, blockchain, or the Internet of Things could yield better results, should those industries grow as expected. It is one of the notable examples of thematic investing strategies with long-term growth potential.
This thesis investigates changes in investor demand for particular investment themes, which we term “thematic investor appetite”. These giga themes drive our thematic investing approach and shape the landscape of opportunities we prioritize across. Thematic investing is an approach which focuses on predicted long-term trends rather than specific companies or sectors, enabling investors to access structural.