The Energy Select Sector SPDR (NYSEArca: XLE), the largest equity-based energy exchange traded fund by assets, spent significant time earlier this year as the top performer among the nine sector SPDR ETFs, but due to slumping oil prices, XLE’s performance has waned in recent weeks.
XLE now trails the Health Care Select Sector SPDR (NYSEArca: XLV) and the Utilities Select Sector SPDR (NYSEArca: XLU) among the nine SPDRs and has attracted a neutral rating from AltaVista Research, though it should be noted that rating is not as ominous as it may sound.
That rating implies average appreciation potential. “A rating of NEUTRAL is assigned to funds with ALTAR Score between 6.0% and 8.0%. This indicates that valuations adequately reflect the fundamentals of stocks in these funds. The majority of funds we cover fall into this category,” according to AltaVista.
Plagued by sagging oil prices, XLE has fallen 3.7% since reaching its all-time on June 23. Oil exchange traded funds slipped Tuesday, with Brent crude falling to a 14-month low, as traders weighed concerns over the global economy, notably conditions in the Eurozone and China, and a seasonal shift. [Poor Fundamentals Plague Energy ETFs]
The United States Oil Fund (NYSEArca: USO) is off nearly 4% over the past month while the United States Brent Oil Fund (NYSEArca: BNO) is lower by 4.6% over the same period.
Last month, the International Energy Agency said global oil demand will slip to its lowest since 2012. The agency cut its demand growth estimates this year and the next after annual expansion in fuel consumption dipped to 700,000 barrels per day in the second quarter, following a weaker global economic outlook by the International Monetary Fund. [Brent Oil ETFs Face Headwinds]
Still, the energy sector offers impressive earnings growth potential and attractive valuations.
“Profits are forecast to bounce back by double digits in 2014 even as revenues are basically flat, though forecasts could change quickly if political turmoil sends oil prices much higher. The Energy sector appears relatively attractive in terms of valuation, trading at a discount to the S&P500 on most multiples, but long term we think the shale oil & gas revolution means larger supplies resulting in lower energy prices–great for consumers but a mixed bag for Energy firms,” said AltaVista in the note.
The research firm estimates 2015 P/E ratio at 14.4 with a price-to-cash flow ratio of 6.9 and a dividend yield of 2.2%.
Energy Select Sector SPDR
ETF Trends editorial team contributed to this post.