×

This year's four worst-performing ETFs all have something else in common

  • Analysts see some upside if oil prices rise.
  • Options trades could be the way to play these names.

The four worst-performing large exchange-traded funds are all exposed to oil and energy. And some strategists see upside potential in these beaten-up names, should oil prices rise.

The funds — the Vanguard Energy ETF, the Energy Select Sector SPDR fund, the JPMorgan Alerian MLP Index ETN and the Alerian MLP ETF, which have respectively fallen 15 percent, 13 percent, 5 percent and 4 percent this year — are all $3 billion or more in size, and are all closely tethered to crude oil, which has fallen over 13 percent year-to-date.

"It really has to do with oil; once you get oil above $50 [per barrel], it's obviously a very different story. What I would say from the options perspective on the oil market, $40 to $50 seems to be the range we've obviously seen it trade there pretty tightly. The options seem to suggest that it will continue to trade in that type of range, which means that these stocks probably just continue to kind of hover around these lows where they are," Stacey Gilbert, head of derivative strategy at Susquehanna Financial Group, said Thursday on CNBC's "Trading Nation."

However, options trades could be the way to play these names with an attractive risk/reward setup, she said. The options market often allows traders to limit their risk, and offers the right to buy or sell underlying assets like equities or ETFs. Gilbert pointed out, for example, that options on a historical basis "are about as cheap as they've ever been," when it comes to owning a call option in the XLE relative to its prices over the last few years.

"I think it's the contrarian way to go, so I actually like travelling a bit in XLE calls here," Gilbert said, adding that "technically, if there is any sort of rally in oil, I think that these names really have the potential to turn and really rip higher in a lot of ways. You could miss that rally."

Indeed, crude oil prices have fallen this year as OPEC-led efforts to curb production have largely failed to hold, global supply remains high and U.S. production has continued rising. Goldman Sachs commodities analysts wrote in a recent note to clients that crude oil, which settled at $46.54 on Friday, could fall below $40 per barrel unless OPEC furthers its impact on the market or if U.S. crude stockpiles and domestic rig counts continue climbing.

The XLE, one of the most popular energy-related ETFs, appears to be facing "unbelievable" resistance against its 50-day moving average since the beginning of the second quarter, and should see further upside if it breaks above that level, according to Miller Tabak equity strategist Matt Maley. In fact, the same pattern has appeared in the Alerian MLP ETF through the same period. The 50-day moving average represents the average of the prior 50 settling prices.

If either fund can break above that average on a technical level, they'll get some momentum, "and momentum names have been very important. Momentum money has been very important in the stock market this year. If it can break out, you can finally get that group to go. But, until they break those levels, I would still want to avoid them," Maley said.

He is largely cautious on the group because of the global glut in oil supply.

Videos

Trades to Watch

Trader Bios

About

Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Brian Sullivan

Brian Sullivan is co-anchor of CNBC's "Power Lunch" (M-F,1PM-3PM ET), one of the network's longest running programs, as well as the host of the daily investing program "Trading Nation." He is also a frequent guest on MSNBC's "Morning Joe" and other NBC properties.

Read more

Connect