After the multi-year rally, broad U.S. benchmarks look fairly valued if not pricey. Nevertheless, investors can still find potential opportunities in energy sector exchange traded funds.
“Most sectors appear to be either fairly or modestly overvalued at present,” writes Ben Johnson, director of global ETF research for Morningstar. “However, the late-2014 downdraft in oil prices appears to have created a potential opportunity in the energy sector. ”
When comparing the energy sector’s price-to-earnings, price-to-book and yields to historical averages, oil-related stocks are trading at the lowest valuations in the current market.
For instance, the Energy Select Sector SPDR (NYSEArca: XLE) has a 1.87 price-to-book, compared to its 2.18 trailing 10-year average, along with a 14.99 price-to-earnings, compared to its 12.86 trailing 10-year average. Meanwhile, the S&P 500 index has a 18.42 P/E and a 2.57 P/B. Morningstar calculates that XLE was trading at a 6% discount to its aggregate fair value.
The Energy Select Sector SPDR ETF includes a broad group of oil-related companies, including integrated oil & gas 32%, oil & gas producers and explorers 29%, equipment and services companies 17%, storage and transportation 10% and refiners 10%. However, the fund is top heavy, with a 15.6% tilt toward Exxon Mobil (NYSE: XOM) and 12.8% in Chevron (NYSE: CVX), but the two firms operate in a diverse set of businesses across the energy space.
“The fund represents an inexpensive and efficient way to invest in the U.S. energy sector without assuming too much idiosyncratic risk,” Johnson said.