Battered and bruised, the energy sector will end 2014 as the worst performing sector in the S&P 500. With that, the Energy Select Sector SPDR (NYSEArca: XLE), a bellwether among energy exchange traded funds, will be the only one of the nine sector SPDR ETFs issued by State Street Global Advisors, to end 2014 in the red.
That after XLE spent significant time earlier this year as the leader of the nine sector SPDRs. Although it is down 10.3% this year and receiving little cooperation from oil prices, which are set for the worst year since 2008, XLE is not lacking for momentum heading into 2015.
XLE has climbed 8.3% since Dec. 15 while investors have poured $2.1 billion of new assets into the fund this month. That is more money than has gone into the Consumer Staples Select Sector SPDR (NYSEArca: XLP), Utilities Select Sector SPDR (NYSEArca: XLU) and the Energy Select Sector SPDR (NYSEArca: XLE) combined. [Equity ETFs Lead 2014 Inflows]
Compelling valuations are one reason investors are flocking to energy ETFs and those valuations could serve as a spark that helps the sector rebound in 2015.
“With a hefty discount to the price-to-earnings ratio of the S&P 500, energy stocks look enticing. Consider this factoid from S&P Capital IQ: There have been six times since 1990 that the S&P 500 Energy Index traded at or below its current relative strength reading. Over a 24-month time frame, the S&P 500 Energy Index was positive six of those six times and beat the S&P 500 five of six times. It also outpaced the S&P 500 by an average 16.2 percentage points,” reports Constance Gustke for CNBC.
Valuations are one reason energy ETFs are teeming with new assets. XLE sports a P/E ratio of just 13.8 compared to almost 18.9 for the S&P 500, according to State Street data.
Exxon Mobil (NYSE: XOM) and Chevron (NYSE: CVX), the two largest U.S. oil companies, have forward P/E’s of 16.4 and 15.6, respectively. The two stocks, which combine for over 30% of XLE’s weight, are two of just five members of the Dow Jones Industrial Average to trade lower this year. [Oil Woes Not Keeping Investors From Energy ETFs]
Plenty of other downtrodden energy ETFs could bounce back in 2015 as investors buy into the “buy when there’s blood on the streets” thesis. That includes the Guggenheim S&P Equal Weight Energy ETF (NYSEArca: RYE).
Joseph Tatusko, chief investment officer at Westport Resources Management, told CNBC that RYE’s equal-weight status could help the ETF be an energy sector leader if the group bounces back.
RYE has at least one advantage by way of decent exposure to refiners. Lower oil prices reduce input costs for refiners, which can lead to higher margins.
RYE does, however, prove the old adage about there being no free lunch on Wall Street. The result of the ETF’s significantly reduced exposure to Chevron and Exxon is increased volatility. RYE’s standard deviation is 23.4%, according to Guggenheim data.
Guggenheim S&P Equal Weight Energy ETF
