Outpacing every other S&P 500 market segment, the energy sector has roared back this year, with one broad energy exchange traded fund standing out from the rest.
The Guggenheim S&P 500 Equal Weight Energy ETF (NYSEArca: RYE) has been the best performing broad energy sector-related ETF of the 2016, increasing 38.0% year-to-date, compared to the 26.5% gain in the widely monitored Energy Select Sector SPDR (NYSEArca: XLE).
The outperformance in RYE may be explained in its alternative indexing methodology. As opposed to traditional beta-index ETFs, like XLE that reflects a cap-weighted index like the S&P 500 Energy Index, the Guggenheim Energy ETF equally weights its components so that smaller companies have a larger tilt in its underlying portfolio.
As we have witnessed this year, the rally in energy stocks on the back of rising crude oil prices helped smaller midsized companies outperform the more cumbersome large-cap segment.
RYE’s largest position in Transocean (NYSE: RIG) only amounts to 3.5% of its underlying portfolio, and due to its indexing methodology, the mid-cap category makes up a hefty 46.9% of the ETF’s portfolio, along with 44.9% large-caps and 8.2% mega-caps.
In contrast, XLE follows a traditional cap-weighted index, with a hefty 16.4% position in Exxon Mobil (NYSE: XOM) and 14.7% in Chevron (NYSE: CVX). Consequently, the fund is more top heavy with a 39.5% position in mega-caps, 44.4% in large-caps and 16.1% in mid-caps.
Moreover, due to its larger emphasis on midsized companies, RYE includes a bigger 22.4% position in the energy equipment & services sub-sector, which have been the worst off during the selling but were among the best performers during the rebound in oil prices.
RYE was also one of the top performing ETFs Monday as the Organization of Petroleum Exporting Countries invited non-members to Vienna to secure additional output cuts following last week’s surprise supply reductions. RYE rose 2.0% Monday.
“OPEC is being taken at its word,” Michael Lynch, president of Strategic Energy & Economic Research, told Bloomberg. “OPEC is still trying to get cooperation with non-OPEC countries, and some people believe that they will be able to wrangle up a few more barrels of cuts.”
For more information on the energy sector, visit our energy category.