West Texas Intermediate futures have climbed 3.2% over the past week, contributing to the recent sturdiness of energy stocks and the relevant exchange traded funds after the sector was the worst performer in the S&P 500 last year.
Cost-conscious investors looking to participate in the energy sector’s rebound can turn to a familiar fund: The Vanguard Energy ETF (NYSEArca: VDE). After a recent fee-reduction, something Vanguard has become famous for, VDE has an annual expense ratio of 0.12%, tying it with the Fidelity MSCI Energy Index ETF (NYSEArca: FENY) for the title of least expensive energy ETF. [New Fee Cuts From Vanguard]
VDE “tracks an index of companies that cover a broad swath of the industry, from oil-rig builders and drill-equipment makers to oil refiners and transportation companies,” reports Kaitlin Pitsker for Kiplinger’s Personal Finance.
That is to say, like its rivals, VDE is heavily allocated to mega-cap integrated oil names, such as Dow components Exxon Mobil (NYSE: XOM) and Chevron (NYSE: CVX). At the end of January, the two largest U.S. oil companies combined for 34.2% of VDE’s weight, according to issuer data.
In the current oil market environment, sticking with the sector’s steadier hands is advisable.
Shares of mega-cap oil names “tend to hold up better than the overall sector, in part because they operate across the many segments of the industry. As a result, the ETF has been 21% less volatile than its peers over the past three years,” according to Kiplinger’s.
The energy sector has been an attractive play from a so-called mean-reservation perspective – the idea that prices and returns eventually move back towards the mean or average. Now that the energy sector has experienced a large pullback, traders are anticipating the sector will at the very least revert back to its historical average.
Due to the downward earnings trajectory within the energy sector, falling oil and equity prices have not led to valuation discounts. The opposite is true as energy is currently one of the most expensive sectors relative to the S&P 500. [Opportunity With Energy ETFs]
Some investors still see opportunity for a material rebound by oil stocks as highlighted by year-to-date inflows of nearly $383 million to VDE.
Vanguard Energy ETF
