Well documented are the energy’s sector woes and things have not been much better to start 2015. Not with the United States Oil Fund (NYSEArca: USO) and the United States Brent Oil Fund (NYSEArca: BNO) down an average of 12% to start the new year.
Weakness in oil futures (USO resides at all-time lows) is predictably plaguing equity-based energy exchange traded funds, such as the Energy Select Sector SPDR (NYSEArca: XLE). XLE, considered by many to be a bellwether energy ETF, is down 3.5% in 2015 after finish last year as the worst of the nine sector SPDRs with a loss of 8.7%. [Oil Slide Not Keeping Investors from Energy ETFs]
“S&P Capital IQ’s Investment Policy Committee recommends exposure to the energy sector consistent with the S&P 500. For those investors who believe that energy securities will stabilize or even move higher in 2015, we think they can augment their portfolio with a stake in one or more sector ETFs. We think it is important to look inside since the exposure they provide is different,” said S&P Capital IQ in a new research note.
The research firm has a marketweight rating on XLE, the largest equity-based energy ETF by assets. XLE allocates a combined 30.8% of its weight to Exxon Mobil (NYSE: XOM) and Chevron (NYSE: CVX), the two largest oil companies. Although Exxon and Chevron were two of the worst performers in the Dow last year, XLE’s heavy exposure to those names could work in the ETF’s favor this year.
Exxon and Chevron are also two of the largest oil refiners and refiners benefit when oil prices slide because lower oil prices reduce input costs for refiners, which can lead to higher margins. [Contrarian ETF Ideas for 2015]
“However, to S&P Capital IQ, these stocks offer solid dividends and buyback potential. The 12-month yield for XLE is 2.4%, higher than that of the broader S&P 500 Index,” according to the research firm.
S&P Capital IQ is less enthusiastic about the Guggenheim S&P Equal Weight Energy ETF (NYSEArca: RYE) in part because RYE’s weight to exploration and production names is 40% or about double the weight XLE assigns to those firms.
Exploration and production stocks are usually more sensitive to oil price fluctuations than their integrated counterparts, like Exxon and Chevron. That much was on display last year when the SPDR S&P Oil & Gas Exploration & Production ETF (NYSEArca: XOP) lost 29.4% as USO plunged more than 42%.
“In addition to the different exposures, RYE ranks lower than XLE according to S&P Capital IQ ETF Research due to its higher net expense ratio (0.40% vs. 0.16%) and wider bid/ask spread ($0.10 vs. $0.01),” said S&P Capital IQ.
The research firm weights RYE underweight. [Energy the Equal-Weight Way]
Energy Select Sector SPDR