The Energy Select Sector SPDR (NYSEArca: XLE), the largest equity-based energy exchange traded fund, and the SPDR S&P Oil & Gas Exploration & Production ETF (NYSEArca: XOP), the largest ETF focusing on exploration and production companies, are up an average of about 16% over the past month.
Plenty of skeptics remain regarding oil’s fundamental outlook despite recent news from the Organization of Petroleum Exporting Countries (OPEC) that the cartel will reduce oil production by 32.5 million barrels per day. Additionally, the recent rallies in XLE and XOP are inviting short sellers to feast on those funds.
“At $2.7 billion and $2.3 billion respectively, the size of the short positions in the XOP and the XLE lag only the SPDR Consumer Staples Sector ETF (XLP), according to Ihor Dusaniwsky, head of research at S3 Partners,” reports Johanna Bennett for Barron’s.
The Direxion Daily S&P Oil & Gas Exploration & Production Bear Shares (NYSEArca: DRIP) takes the -3x, or -300%, daily performance of the S&P Oil & Gas Exploration & Production Select Industry Index, the same index tracked by XOP.
As ETF Trends reported last week: While energy companies are expected to be the largest contributor to earnings decline for the S&P 500 in the third quarter, the stabilizing crude oil prices and potential production cutbacks from major oil producers could help support sector-related exchange traded funds.
Some analysts expect the energy sector will become a positive contributor to earnings growth for the S&P 500 by the first quarter of 2017 due to a combination of higher expected oil prices and easier comparisons to weak earnings in 2016.
XOP is often one of the most heavily shorted ETFs on the market.
“It seems like the XLE short is more of a core short position hedging out general oil related risk for long and hedged portfolios with its holdings of mostly larger cap names such as Exxon Mobil (XOM US), Chevron (CVX US) and Schlumberger (SLB US). XLE is a general collateral stock borrow, the cheapest borrow cost for the easiest to borrow stocks,” according to the S3 Partners note seen in Barron’s.
For more information on Energy ETFs, visit our Energy category.