Some well-known equity-based energy exchange traded funds have been lethargic, to put it kindly, in the first quarter of 2014.
For example, the Energy Select Sector SPDR (NYSEArca: XLE) is up just 1.3%, a middling performance among the nine sector SPDR ETFs and one that is barely better than the year-to-date returns offered by the Consumer Staples Select Sector SPDR (NYSEArca: XLP). This year, the Utilities Select Sector SPDR (NYSEArca: XLU) has been 10 times better than XLE. [Utilities ETFs Flex Their Muscles]
That does not mean ETFs such as XLE and the Vanguard Energy ETF (NYSEArca: VDE) cannot rebound. Actually, some investors are betting on just that: An energy sector ETF rally.
Investors are “putting seven times as much into exchange-traded funds as they did last quarter,” reports Jim Polson for Bloomberg.
Last year, XLE’s sluggishness combined with inflows to other sector ETFs sent the fund from third-largest of the nine SPDRs to the fifth spot. XLE has since reclaimed the fourth spot behind its financial services, technology and health care equivalents. [Health Care ETF Becomes Third-Largest SPDR]
“A key indicator is net new money from investors — or fund purchases minus redemptions. ETFs focusing on oil and gas companies have captured 20 percent of the $10 billion in net inflows into those ETFs this year. They hauled in only 2.5 percent of fresh money last quarter, and 7.7 percent in all of 2013,” writes Polson for Bloomberg.
One reason investors are getting interested in energy ETFs again is valuations. As measured by Morningstar’s price/fair value ratio as of March 21 “it appears as though current valuations look favorable in the energy sector, as four out of 10 of the cheapest exchange-traded products have ties to this segment of the market,” according to Morningstar’s Ben Johnson.
Those ETFs include XLE, VDE and the iShares U.S. Energy ETF (NYSEArca: IYE) with XLE being slightly cheaper than its two rivals.
What that says is integrated oil stocks are trading at discounts. XLE allocates a combined 29.1% of its weight to Dow components Exxon Mobil (NYSE: XOM) and Chevron (NYSE: CVX), the two largest U.S. oil companies. Those stocks combine for over 34% of IYE’s weight and 33.5% of VDE.
Energy Select Sector SPDR