ETF Trends
ETF Trends

After jumping more than 2% on Monday, the Energy Select Sector SPDR (NYSEArca: XLE), the largest equity-based energy exchange traded fund, is higher by nearly 21% year-to-date. That makes XLE the best-performing member of the sector SPDR ETF suite and some traders believe the rally in energy equities can continue.

Revitalized earnings could push the sector higher. The growth is not surprising as the energy sector has been one of the worst areas in earnings growth. For Q3 2016, the sector is expected to reveal its largest year-over-year earnings decline of 66%, the worst performance of all 11 S&P 500 sectors.

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.

“Ritholtz Wealth Management CEO Josh Brown said Monday that investors correlate earnings outlook with future performance too often, and said that wasn’t the case with the energy sector this year,” reports CNBC.

Predictably, the Organization of Petroleum Exporting Countries looms large for energy stocks and oil ETFs. The cartel meets later this month.

The oil market strengthened on news that Iraq and Iran, two of OPEC’s most reluctant members in favor of reducing production, may be backing the cartel’s proposal, the Wall Street Journal reports. Anticipating OPEC will announce and implement a production cut, Goldman Sachs raised its forecast for oil prices in the first half of 2017. A Bank of America Merrill Lynch research note also anticipates a supply cut is highly likely.

Integrated oil stocks have refining exposure, a segment that benefits when oil prices are low due to improved margins. That can help steady diversified energy ETFs like XLE because these are not dedicated exploration and production funds.

Energy Select Sector SPDR