Higher Interest Rates Could Benefit Energy ETFs

The Energy Select Sector SPDR (NYSEArca: XLE), the largest equity-based energy exchange traded fund, is one of the best performers among the sector SPDR suite of ETFs this year. Obviously, rebounding oil prices are playing a significant role in XLE’s 2016 resurgence, but higher interest rates, if that scenario finally comes to pass, could boost energy ETFs as well.

Some oil related assets, including master limited partnerships (MLPs), are benefiting from lower interest rates. However, traditional oil equities are seen as cyclical plays. That means the energy sector could get a lift from higher interest rates because such a move by the Federal Reserve would signal confidence in the U.S. economy.

MLPs primarily deal with the distribution and storage of energy products, so their business model is less reliant on the commodities market since MLPs profit off the quantity of oil and natural gas they are able to move around.

Related: Downtrodden MLP ETFs May Offer Long-Term Opportunity

“As a result, low cost of capital makes new non-fossil facilities more competitive with new fossil-fueled plant. The current low interest rate environment favors non-fossil power generation. Carbon emissions reductions that result can also be seen as an unexpected consequence of low interest rates,” according to OilPrice.com.

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).