ETF Talk: Is Energy Running out of Steam?

With the energy sector exhibiting a second-straight year of weakened demand, the situation could be appealing to investors who may be willing to short utilities in a search for quick profits. Exchange-traded funds (ETFs), such as ProShares UltraShort Utilities (SPD), are available to allow aggressive investors to bet on a retreat in utility stocks. The question is when to pull the trigger on such a trade, since utilities still seem to be aided by the stock market’s general upward trend.

ProShares UltraShort Utilities is a leveraged ETF that seeks daily investment results, before fees and expenses, that correspond to twice (200%) the inverse (opposite) of the daily performance of the Dow Jones U.S. Utilities Index.

But why consider shorting utilities now?

While certain sectors have been surging, utilities are vulnerable. The chart below indicates that this leveraged short fund generally has been unprofitable for investors since March. However, the chart also shows that short-term opportunities have arisen that allowed investors to turn a profit when entering and exiting at the right times. Lately, the energy sector seems to be getting low on juice.

Indeed, U.S. electricity output fell 3.7% last year to mark its biggest drop since 1938, according to federal statistics. That decline in output comes on the heels of close to a 1% production dip in 2008. Reduced U.S. energy production does not appear to be a fluke. The downward trend in demand and production for energy are attributed to a slow economy, conservation efforts and, at least last year, a relatively mild summer in many parts of the United States. As a result, forecasting demand and revenues is becoming increasingly challenging. Without a clear sign that energy demand will be rebounding, it makes it difficult for utilities and the analysts who follow them to make accurate projections.

The question for investors is whether the energy sector is on the verge of giving up some of the gains that it collected since the market began advancing last March. I currently am not recommending shorting energy stocks; however, a case certainly can be made for doing so.

If you needed to pick the industries that are most vulnerable to a retreat, utilities probably should be on your list. Of course, it does not mean investing in a leveraged short fund will help you to turn quick profits right away. You may want to wait and watch the sector in the coming weeks before deciding whether shorting utilities with a leveraged fund is something that you want to try.

If you want advice from me about which ETFs to buy and to sell, I encourage you to sign up for my ETF Trader service by clicking here. As always, I am pleased to answer any of your questions about ETFs, so do not hesitate to contact me if you have one. To send your question to me, simply click here. You may just see your question answered in a future ETF Talk.