Oil prices stumbled in August, but lower crude prices did not negatively affect equity-based energy exchange traded funds. For example, the Energy Select Sector SPDR (NYSEArca: XLE), the largest equity-based energy exchange traded fund, is up more than 3% over the past month.
The third quarter is historically unkind to the energy sector, but some industry observers believe the recent pullback in crude prices is not a cause for alarm and that there is still upside available with some of the big-name integrated oil companies held by ETFs like XLE.
SEE MORE: 4 Energy ETFs may be at Near-Term Tops
In fact, some market observers argue that the once downtrodden energy sector offers more upside as some of the group’s more controversial names start participating in the rebound. 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).
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_stories]The worst could be behind the energy sector in terms of negative earnings and the sector is inexpensive relative to historical averages.
“When it comes to energy stocks, we’re actually seeing a fair amount of stability,” said Erin Gibbs, chief investment officer at S&P Global, in an interview with CNBC. “The energy sector is trading in this fairly tight range of $490 to $520, and right now we’re in the middle of that range just like we are with the price of oil between $40 and 50.”
The energy sector is just one of two S&P 500 sectors that currently trades at a noticeable discount to its long-term averages. Additionally, the energy sector is usually among one of the largest sector weights in value ETFs, underscoring the point that the group is attractively valued relative to some defensive sectors, which trade at lofty multiples.
Still, making the sector’s rebound this year all the more impressive is that it comes against the backdrop of still low oil prices, little help in the way of significant production cuts and massive spending reductions by global oil majors.
Related: Why Investors are Bearish on Oil ETFs
“RJO Futures senior market strategist Phillip Streible also believes that oil’s drop isn’t too big of a concern, especially the oil supply glut that has investors nervous,” according to CNBC.
For more information on Energy ETFs, visit our Energy category.
Energy Select Sector SPDR
