ETF Edge

Investors need 'a steel stomach' to buy into energy at these levels, ETF expert says

Energy ETFs lower on trade tensions

Talk about low energy.

Oil prices slid Wednesday as restricted U.S. stockpiles weren't enough to offset growing concerns around the U.S.-China trade dispute. Energy-focused exchange-traded funds largely followed, with most ending the day flat and the popular Energy Select Sector SPDR Fund shedding 0.6%.

After a poor first-quarter showing for many of the oil and gas companies within these ETFs, "it's going to require somewhat of a steel stomach to step back into this marketplace," said Matthew Bartolini, managing director and head of SPDR Americas Research at State Street Global Advisors.

"I think the whole entire energy sector has been facing some weak price momentum, but also earnings momentum," he said Wednesday on CNBC's "ETF Edge." "Not a lot of firms were beating expectations."

Bartolini advised those steel-stomached investors to seek value in drilling companies rather than oil-service companies, which tend to have major revenue exposure to overseas markets.

But funds consisting largely of oil-drilling companies, like the SPDR S&P Oil & Gas Exploration & Production ETF, are more sensitive to oil prices, so it's understandable why investors would want to steer clear of the space altogether for now, Bartolini said.

"[Drilling companies are] going to have a higher sensitivity to the spot price of oil. And given that it's fallen so much over the last few weeks and we have a potential impact of weakening demand, some[thing] like XOP would have sort of a negative skew to it," he said. "But, again, if we get a reprieve from these trade tensions, that higher sensitivity could be a benefit to those investors willing to take on that higher volatility."

CFRA's Todd Rosenbluth had a few recommendations that take oil prices largely out of the picture.

"We think a good way of playing this is through the [master-limited partnership], the transportation side of the space," Rosenbluth, the firm's senior director of ETF and mutual fund research, said in the same "ETF Edge" interview. "So, MLPX is a Global X ETF that offers stability of the income stream that's there. These companies are impacted more from volumes than oil prices. So that may be a safer way of playing the energy sector, according to CFRA."

He told investors to look for companies with strong fundamentals, even if that meant dipping their toes in larger-cap funds like the Energy Select Sector SPDR Fund or the Vanguard Energy Index Fund ETF Shares.

"Those are more mega-cap-oriented strategies," he said. "You can hide a little bit out from the Exxons, the Chevrons, that have more stable income streams."