After the plunge in crude prices and oil stocks, energy sector exchange traded funds may now offer a cheap long-term play.
Investors have picked up the energy stocks, even as the sector continued to fall. For instance, the Energy Select Sector SPDR (NYSEArca: XLE) has attracted $3.2 billion in net inflows over the past three months, according to ETF.com data, while the ETF has declined to 7.7%.
“Broad-based energy funds have seen the most consistent money flows over the past three months as investors look to put money to work in the sector,” Neil Leeson, an ETF strategist for Ned Davis Research, said in a Barron’s article. “Investors started to buy energy ETFs on the first decline in October, and increased their buying as the ETFs made new lows in December. Of the 10 sectors, energy has taken in the most new money this year, just over $6 billion.”
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. [Don’t Frown, Average Down: Investors Still Chasing Oil ETFs]
Moreover, Leeson argues that valuations now look favorable and other technical factors point to improving momentum in the sector.
“Trend improvement, oversold, relative strength improvement, undervaluation and positive flows all at once is a rare event,” Leeson added. “The last time all the stars aligned like this was at the market low in 2009. Prior to that, you would have to go back to 2003.”