Additionally, the energy sector is becoming increasingly correlated with the broader market. “Over the years, the diversification potential of XLE seems to have been eroding. Over the trailing 10-year period, it has been 70% correlated with the S&P 500. However, over the trailing five- and three-year periods, XLE’s correlation to the S&P 500 has increased to 84% and 88%, respectively,” according to Morningstar.

Medium-term upside catalysts for XLE and its marquee constituents include the aforementioned compelling valuations, sturdy balance sheets, dividend increases (Exxon and Chevron both have multi-decade payout increase streaks going) and the potential for the return of medium- to large-scale energy sector mergers and acquisitions activity.

Five of XLE’s top-10 holdings closed five percent or more below their respective 52-week highs on Tuesday.

Energy Select Sector SPDR

ETF Trends editorial team contributed to this post.