Equity-based energy sector exchange traded funds have received ample attention and new assets this year.
The sector’s status as a value destination and a late-cycle play has buoyed it this year. The Energy Select Sector SPDR (NYSEArca: XLE), the largest energy sector ETF by assets, is up 13.4% year-to-date. After adding $2.6 billion in new assets, XLE is the only sector fund to rank among the top-10 ETFs in terms of 2014 inflows. [Where ETF Cash has Been Going]
Bolstered by accelerating production and expectations the U.S. economic recovery will continue in the second half of this year, some analysts are bullish on energy stocks.
“Sam Stovall, Chair of the S&P Capital IQ Investment Policy Committee and managing director for U.S. equity strategy, notes that financial services tends to be an early economic cycle sector, while energy tends to be a later cycle sector. S&P Capital IQ expects the U.S. economy to improve in the second half of 2014 and 2015, but believes we are no longer in the early stages of the economic recovery. Further, in terms of the energy upgrade, S&P Capital IQ believes geopolitical risks in the Middle East are dampened to some extent by rising U.S. production,” said S&P Capital IQ in a new research note.
The research firm recommends an 11.4% weight to the energy sector, which is about 70 basis points above the sector’s weight in the S&P 500. S&P Capital IQ has buy or strong buy ratings on 36 U.S. energy names, including Chevron (NYSE: CVX) and Schlumberger (NYSE: SLB).
Dow component Chevron (NYSE: CVX), the second-largest U.S. oil company, and Schlumberger, the largest provider of oilfield services, are the second- and third-largest holdings in XLE. The stocks combine for about 20.5% of the ETF’s weight. S&P Capital IQ rates XLE overweight.
Speaking of oil services stocks and ETFs, “oil services names, like SLB, should benefit in 2015 from a boost to deepwater activity levels, as deepwater services work typically carries higher margins,” said S&P in the note. The research firm has an overweight rating on the Market Vectors Oil Service ETF (NYSEArca: OIH).
The $1.5 billion OIH, which is up 21% this year, allocates 20.7% of its weight to Schlumberger. That is nearly 800 basis points more than the weight given to Halliburton, the ETF’s second-largest holding. [ETFs Loaded With the Best S&P 500 Stocks]
S&P Capital IQ also has an overweight rating on the Fidelity MSCI Energy Index ETF (NYSEArca: FENY). FENY debuted last October and was sitting on $133.7 million in assets at the end of June, indicating the fund has been critical in the ascent of Fidelity’s sector ETF suite to over $1 billion in combined assets. [Fidelity ETFs Race to $1B in Assets]
FENY allocates a combined 18.3% of its weight to Chevron and Schlumberger.
Energy Select Sector SPDR