- Oil price surge bring reversal of fortune for XLE – the worst-performing sector SPDR ETF in past two years
- Bright spots have been few and far between for equity-based energy ETFs this year
- However, for all the struggles encountered by the sector, it still is not inexpensive relative to the S&P 500
As oil prices surged nearly 10% last week, the Energy Select Sector SPDR (NYSEArca: XLE) gained nearly 1%, bringing its year-to-date gain to roughly the same amount. That marks an impressive reversal of fortune for XLE, which was the worst-performing sector SPDR exchange traded fund in each of the past two years.
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]
However, even as U.S. shale production remains high and there are few, if any, signs that members of the Organization of Petroleum Exporting Countries (OPEC) are prepared to pare output, some market observers the darkest clouds may have passed the energy sector.
Good news: ETFs look like a better approach to playing an energy sector rebound than stock-picking.
“Those who want to take advantage of a potential rebound may want to consider getting into the sector now, when stock prices are still depressed. While one can buy energy-related stocks, that’s not an approach for the faint of heart, and there may be a cheaper and less risky way to play this sector,” reports Bryan Borzykowski for CNBC.
Investors should realize while some energy ETFs share similarities, most vary greatly from each other. For example, XLE and rival cap-weighted energy ETFs focus heavily on the largest energy names, such as Dow components Exxon Mobil (NYSE: XOM) and Chevron (NYSE: CVX), the two largest U.S. oil companies.
Oil majors have tightened their belts, reducing costs by laying off thousands of workers and halted many new projects. Large integrated oil companies are expected to hold up better than drilling stocks as these giants have both upstream exploration and production, along with downstream refining operations.
“Over the last several years, numerous sector-focused ETFs have come to market, including several energy industry funds. Since ETFs track market indexes, it’s not surprising that most energy ETFs have done poorly over the last year,” adds CNBC.
Energy Select Sector SPDR
