Words of Caution on Energy ETFs

While it is not setting the market on fire by any stretch, the Energy Select Sector SPDR (NYSEArca: XLE) is acting somewhat better to start 2016 than it did in the previous two years when it was the worst-performing sector SPDR exchange traded fund.

Still, bright spots have been few and far between for equity-based energy exchange traded funds this year and for all the struggles the encountered by the sector, it still is not inexpensive relative to the S&P 500. In fact, the energy patch is downright pricey compared to the broader market. This after a spate of spending cuts that have not been met with widespread enthusiasm among investors. [Oil ETF Dividends Appear Safe…Sort Of]

And with good news for the energy sector still hard to come by, many analysts and market observers are cautious on the sector’s near-term outlook.

Brad Handler, managing director of equity research at Jefferies, told CNBC that he “thinks that oil companies are currently reacting to credit constraints and agency rating pressures, and are struggling to manage dividends and balance sheets. While those factors are still in play, investors should stay away from the sector.”

The low oil environment may persist as the Organization of Petroleum Exporting Countries projects demand for its crude to remain lower in 2020 than in 2016 as rivals remain resilient despite the depressed prices.