These oil & gas ETFs can help you 'ease into' energy trading

00:00 Julie

Geopolitical volatility has seen a rotation towards higher quality ETFs as investors aim to diversify their risks amid uncertainty. Let’s get into this now and where other opportunities might lie across ETFs. Joining me now Christian Magoon, Amplify ETF CEO. He’s with me for this week’s ETF report brought to you by Pimco. Christian, good to see you. So talk to me about this action that you’ve seen underlying the market and whether that rotation into higher quality has persisted even as the market has been making new highs.

00:46 Christian Magoon

We came into the year advising people to buckle up and sure enough, uh what showed up is this conflict and this conflict has really uh started to de-risk the markets. With that being said, we have days like today where peace uh news comes out and we get to be uh risk on. So, we really think the way to ride this is this higher quality equity allocation with ETFs. And what I but what I mean by that is larger cap companies that are dividend payers, and then bolting on the ability to have covered calls on that uh equity position. That really gives you, you know, three types of return, capital appreciation from the equities, dividend income, and then also option income. Uh the key there is to have kind of those three engines working for you so that you’re just not dependent on being risk on every day and then you cushion during the risk off days.

02:00 Julie

And as we’ve seen um rates kind of start to come down and or or be be range bound, right? Have we seen some migration into some of these dividend plays from say fixed income also? I mean, what what does that like quest for stability and yield? How is that manifesting right now?

02:27 Christian Magoon

Yeah, so we have. We’ve definitely seen kind of two areas where these products have benefited. Um and you know, really the lower overall yields and maybe the thought at times this year, again, something that’s gone back and forth of rates going lower. Uh those people looking at, you know, higher income, equity income ETFs and there’s some pretty substantial yields. Uh what you have to be careful about is getting into yield traps where you’re seeing yields that just don’t look uh sustainable in some of these products where you could see yields of, you know, 20 or 30% or even individual stock ETFs that may support a 70% yield but have massive business risk on the underlying stock and ultimately really don’t generate total returns. We think the yield smart way of doing that uh and getting into this derivative income is balancing capital appreciation and having only light coverage or light covered call coverage on your portfolio. Maybe only half of the portfolio or less is covered and then writing those covered calls just slightly out of the money so that you have the ability to appreciate 4, 6% before those covered calls uh take your upside away. So, it’s very important to be balanced. You know, we have our yield smart ETF product line that takes that philosophy of balancing capital appreciation and income across asset classes, uh not only equities but also in the crypto space and as well uh as the bond space.

04:22 Julie

Um I want to ask you about energy stocks also. I mean this is the best performing group and then some in the S&P 500 this year, but, you know, it’s kind of muddled along over the past several years. And I’ve seen some recent more bullish commentary that people expect it to continue to run. I think you guys are in that camp also.

04:47 Christian Magoon

Yeah, we are. We think that there’s a long-term under investment in the energy infrastructure, whether that’s oil and gas. Uh you know, lower prices which we have been in the last few years up until this year, uh kind of make uh that investment muted. Uh and when we look at kind of the overall power situation in the US, we are in an energy crisis as defined by the administration. We need more electrification, more power for AI data centers, etc. And the primary way that’s occurring is through oil and gas. In in fact, 75% of all power of AI data centers is coming from uh natural gas. So, we really believe that this is a long-term thesis. The issue is maybe are you getting in at the right time, right? Because of this recent conflict and you know, we have a energy and natural resources ETF, NDIV. It’s a five-star rated fund. It has a 10% yield from dividend and option income. It’s part of our yield smart suite and allows you to maybe ease into energy here with having that very solid income stream but also capital appreciation. So, if you’re not timing it right here, if we have a major peace deal and maybe that does crater oil for a bit, you have that cushion. Likewise, uh you know, if oil continues to be in the news uh and constricted, you’ll benefit. NDIV is up nearly 30% this year. And again, that’s with a 10% distribution uh that’s annualized over the course of the year. So, even though you had that income component, it didn’t really prevent you to have that upside. And again, that’s another way of uh kind of illustrating why we think it’s important to balance capital appreciation with attractive income.

07:11 Julie

Christian, good to see you. Thanks for joining us.

07:13 Christian Magoon

Thanks, Julie. Take care.