After trailing the broader markets for most of the year, energy sector stocks and exchange traded funds are finally leading the charge.
Energy Select Sector SPDR Fund (NYSEArca: XLE) has been outperforming the S&P 500 since mid-April.
The energy sector shows attractive valuations, with component holdings in the XLE at a price-to-earnings ratio of 12.45, compared to the 16.4 P/E of SPY.
The energy sector was the second-best performing sector, slightly behind technology stocks, last week as the strengthening oil market and better jobs report help push the S&P 500 to record highs. [VIX ETFs Drop on Jobs Report as S&P 500 Clears 1,600]
“The oil market has broken out and the jobs report is the biggest catalyst,” said Jeff Grossman, president of BRG Brokerage and a New York Mercantile Exchange floor trader, said in a Bloomberg article. “The stock market is strong and everything is going higher.”
“People had been a bit nervous about oil demand and economic growth,” Michael Lynch, president of Strategic Energy & Economic Research, said in the article. “This report gives people a sense that maybe the U.S. economy will not pause, but instead may accelerate in the second quarter.”
Along with the positive cyclical data that has helped the energy sector, long-term trends will continue to support these energy stocks. [Energy ETF Highest Since 2008]
“Oil, in particular, is becoming harder to find and extract,” according to Morningstar analyst John Gabriel. “Global oil production has been stagnant since 2005, even after a trillion-dollar investment by the oil and gas industry. The number of oil discoveries as well as the size of discoveries made has been declining for decades. Oil-services firms’ expertise is growing increasingly more valuable as the industry seeks to explore and extract oil from ever-more-challenging frontiers in new deep-water and even Arctic efforts.”
Other energy sector ETFs include:
- Vanguard Energy Index Fund (NYSEArca: VDE): up 8.9% year-to-date
- Market Vectors Oil Services ETF (NYSEArca: OIH): up 10.4% year-to-date
- iShares Dow Jones US Energy Sector Index Fund (NYSEArca: IYE): up 9.5% year-to-date
In comparing the energy sector with the broader S&P 500, XLE is finally gaining against SPY.
For more information on energy, visit our energy category.
Max Chen contributed to this article.