ETF Trends
ETF Trends

Arguably, no asset class or sector fits the definition of contrarian idea the way oil and equity-based energy exchange traded funds do. Underscoring that point, 22 ETFs hit all-time lows yesterday, five of which were oil funds.

Oil’s wicked slump, one that has the Energy Select Sector SPDR (NYSEArca: XLE) positioned to be the worst of the nine sector SPDRs for a second consecutive year, is not proving to be a deterrent for investors. Actually, the opposite is true. As we have noted several times in recent months, investors are piling into energy funds, including XLE.

“With a year-to-date return of negative 23.4% through August 6, one might have thought investors would flee the equity energy sector’s largest ($11.4 billion) exchange-traded fund, but instead it’s become a contrarian’s playground. Consider this: the 35 months before XLE’s peak price in June 2014 saw cumulative net inflows of just $69 million – barely anything for a fund of this size. But since June 2014, when the price of XLE hit its all-time high of just over $101/share, net inflows have totaled nearly $3.1 billion. For the recent flows week ended August 5, another $74 million was added (red column in chart), despite XLE touching its lowest price in three years,” according to Lipper data.

Said another way, XLE has added $1.36 billion in new assets this year and it is the worst-performing sector SPDR, but that total is more than half the inflows to Health Care Select SPDR (NYSEArca: XLV), the best-performing SPDR. It would be reasonable to expect the gap between best and worst would be greater or that XLE would be losing money as it falls. Obviously, that’s not the case.

The larger integrated oil companies are more flush and have a larger war chest to draw upon when times get tough. While big oil has cut stock repurchase plans to save cash, many bigger players have not gone so far as to cut back on dividends. For instance, Exxon and Chevron have historically exhibited a long standing of steadily increasing dividends and remain so-called dividend aristocrats. [Oil ETF Dividends Appear Safe…Sort Of]

Profit expectations have fallen dramatically which in turn has pushed the sector’s P/E ratio much higher even as stock prices have declined, though P/Es have come off their highs and estimates appear to have stablized,” according to AltaVista.

Energy Select Sector SPDR

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.