Energy ETFs Poised to Pullback in Q3?

The Energy Select Sector SPDR (NYSEArca: XLE), the largest equity-based energy exchange traded fund, is coming off a solid second quarter and is one of this year’s best-performing sector funds. In fact, energy is one of this year’s best-performing sectors, but with the arrival of the third quarter, there are some concerns energy stocks and ETFs could be poised to pullback.

Investors should be aware that XLE and its aforementioned rivals allocated hefty portions of their lineups to the largest oil companies, including Dow components Exxon Mobil (NYSE: XOM) and Chevron (NYSE: CVX) along with Schlumberger (NYSE: SLB), the largest oilfield services provider. In some cases Exxon Mobil and Chevron, the two largest U.S. oil companies, combine for up to a third of these ETFs’ weights.

Related: 4 Energy ETFs may be at Near-Term Tops

With the arrival of the third quarter, an interesting dynamic is at play. Energy stocks historically are slack performers over the next several months while oil is one of the third quarter’s best-performing commodities on a historical basis. Rivals to XLE include the Vanguard Energy ETF (NYSEArca: VDE), iShares U.S. Energy ETF (NYSEArca: IYE) and the Fidelity MSCI Energy Index ETF (NYSEArca: FENY).


“Right now, the options market is really suggesting that we’re going to likely take a breather here,” said Stacey Gilbert, head of derivative strategy at Susquehanna, in an interview with CNBC.

For those seeking a hedge against further weakness in the energy sector, the ProShares Short Oil & Gas (NYSEArca: DDG) tries to reflect the inverse, or -100%, daily performance of the Dow Jones U.S. Oil & Gas Index.