When it comes to making contrarian bets with sector exchange traded funds to start the new year, energy ETFs come to mind and with good reason.
In 2014, the Energy Select Sector SPDR (NYSEArca: XLE) was the worst performer among the nine sector SPDR ETFs and the only one of the nine to finish the year lower. That is to say energy was by far the worst-performing sector in the S&P 500 after spending significant time earlier last year as the leading sector.
The silver lining in oil’s decline is oil stocks have been favorably, if not dramatically, repriced, making the energy sector one of the most attractively valued in the S&P 500 while defensive darlings staples and utilities look expensive. [ETFs for a 2015 Energy Rebound]
“The recent plunge in oil prices has created a dramatic re-pricing of stocks in the energy sector. For investors who are looking for inexpensively valued stocks that may be poised to benefit from mean reversion (the theory that stocks move toward their average price over time), energy stocks are now on the radar for a rebound in 2015,” according to a recent research note by Invesco PowerShares, the fourth-largest U.S. ETF issuer. [A Contrary Play for the Patient Investor]
One energy ETF that has recently been showing signs of life is the PowerShares Dynamic Energy Exploration & Production Portfolio (NYSEArca: PXE).
Up 11% since Dec. 15, PXE tracks the Dynamic Energy Exploration & Production Intellidex Index and that index is, well, dynamic. The index considers companies based on price momentum, earnings momentum, quality, management action, and value, according to PowerShares.
The ETF makes for an alluring value proposition because of its robust exposure to refiners. Lower oil prices reduce input costs for refiners, which can lead to higher margins. [This Energy ETF Could Surprise]
“At writing, the P/B of the S&P 500 Energy Sector was 1.78 and on the lower end of the range seen since 1990. The ratio had lifted from a low of 1.605 on Dec. 15, 2014,” according to PowerShares.
The PowerShares DWA Energy Momentum Portfolio (NYSEArca: PXI) is another energy ETF with the look of a 2015 contrarian play after falling 18.5% last year.
The $155.8 million PXI tracks the DWA Energy Technical Leaders Index, which attempts to identify energy sector constituents displaying positive relative strength characteristics. With refiners among the energy sector’s relative strength leaders at the moment, PXI, like PXE, features robust refiner exposure.
Of PXI’s top 10 holdings, a group that combines for nearly 40% of the ETF’s weight, five are refiners. That quintet includes Tesoro (NYSE: TSO), Marathon Petroleum (NYSE: MPC) and Phillips 66 (NYSE: PSX).
“Oil prices had a material decline in 2014, although it is too early to say they have bottomed and history may argue for more weakness into the New Year. At the same time, energy stocks are showing inexpensive valuation based on their P/B ratio, and valuation suggests investors may want to put the energy sector on their shopping list for 2015,” according to PowerShares.
PowerShares DWA Energy Momentum Portfolio
