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Here in Texas, we expect summer to be hot. Somehow we cope with 100-degree days. This year has been worse than usual. And to make matters worse, we’re in the middle of a severe drought, too.
The little rainfall in the summer is usually the result of hurricanes coming ashore. I’m sure it was a relief for people along the coast when Tropical Storm Don fizzled last week, but inland Texans like me were disappointed. We were ready to get drenched.
Will we get another chance? Maybe. As my colleague Sean Brodrick pointed out recently, hurricane season historically peaks in August/September.
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| Hurricane risk picks up sharply in August. |
Whether you like hurricanes or not, they make a difference to your ETF portfolio. You can’t ignore them even if you live hundreds of miles from the sea.
Today let’s look at three ETF groups that can be directly affected by hurricanes — and not in the ways you might expect.
Energy Services: The Eye of the Storm
Offshore oil rigs are usually the first victims when a storm enters the Gulf of Mexico. Most offshore drilling and production is actually done by subcontractors from the energy service sector. These companies don’t own any oil and gas. They just get paid to find it and pull it out of the ground.
Energy service stocks that specialize in offshore operations have the most to lose from hurricanes — particularly if they work in tropical areas. Every minute of lost time is also lost profit potential.
However, these same stocks can sometimes make huge gains after a hurricane strikes. The reason is simple — they are the companies that will be called upon to replace and repair damaged equipment.
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| Hurricanes are not fun when you own one of these. |
Investing in energy services through an ETF instead of individual stocks is a good way to mitigate this risk. Even so, the sector is volatile even when the weather is fine.
Here are some of the largest energy services sector ETFs. If you own any of these, keep a careful eye on them the next couple months.
- iShares DJ U.S. Oil Equipment & Services (IEZ)
- SPDR S&P Oil & Gas Equipment & Services (XES)
- PowerShares Dynamic Oil & Gas Services (PXJ)
Pipelines: No Supply = No Revenue
Income investors love master limited partnerships. I’ve written about Energy MLP exchange-traded notes. They can be a great addition to conservative portfolios, but they aren’t risk-free.
Think through how this works. Energy MLPs generate income by storing and transporting oil and gas. If they have nothing to store or transport, income can quickly drop to zero.
Why would a pipeline run out of oil? Well, one reason might be that the oil well at the other end of the pipe is closed down by a hurricane. The math is pretty simple. No production = no product into the pipeline = no money out of the pipeline.
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| Empty pipes mean no money for anyone. |
Under normal circumstances, this risk is pretty low. So I don’t suggest you rush out of any MLP investments you may own. In fact, a big storm that disrupts production could actually be a buying opportunity in some of these top MLP ETNs:
• JPMorgan Alerian MLP Index ETN (AMJ)
• Credit Suisse Cushing 30 MLP Index ETN (MLPN)
• UBS ETRACS Alerian MLP Infrastructure ETN (MLPI)
Insurance: Swinging Both Ways
Who are some of the first people to swoop in when hurricanes strike? Insurance adjusters! They aren’t there just to be nice, either. The companies need to know their liabilities, and they need to know quickly.
The impact of a big storm on the insurance sector is oddly unpredictable. Of course, they would much prefer to collect premiums and never pay any claims. But they know they’ll have to pay out sometimes. Hurricanes are a problem only if the damage is more than the company’s analysts expected.
Sometimes storm damage can actually help property insurers. How? Premium rates are government-regulated in some places. Major hurricane damage may convince the authorities to allow a rate increase. That means more future income, so insurance stocks can go up.
Nevertheless, if you own any of these insurance sector ETFs, keep a close eye on them during hurricane season. You may get an unexpected dip, or a surprising bonus.
- SPDR KBW Insurance ETF (KIE)
- iShares DJ U.S. Insurance (IAK)
There’s another ETF that specializes in this area — PowerShares KBW Property & Casualty Insurance (KBWP). However, this ETF is thinly traded and often goes days without any trades, so I suggest you steer clear of this one.
Hurricanes are a force of nature we can’t control. But thanks to modern technology, we can know when they are coming.
These three groups of ETFs are all affected by them — sometimes negatively and sometimes positively. Now you know what ETFs to keep your eye on as you track hurricanes this season.
Best wishes,
Ron
PS. For clear, concise alerts on when to get into an ETF — and when to get out — you may be interested in my International ETF Trader service. Watch my latest video here.
