The most recent oil bear market turned the energy sector into a burden in terms of S&P 500 earnings, but as oil output declines and prices rise, that burden is being lifted. In fact, energy sector and exchange traded funds such as the Energy Select Sector SPDR (NYSEArca: XLE), the largest equity-based energy ETF, could see their holdings deliver upside earnings surprises.
Energy companies were largest contributor to the 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.
Oil services ETFs, such as the VanEck Vectors Oil Service ETF (NYSEArca: OIH) and the SPDR Oil & Gas Equipment & Services ETF (NYSEArca: XES), have also been solid performers and have earnings upside surprise potential.
That earnings drag is evaporating as S&P 500 energy earnings are expected to be only slightly negative for the fourth quarter and offer significant upside potential moving forward in 2017.
“Spurred by an improving outlook for global demand and an agreement to cut oil production from OPEC and non-OPEC producers, analyst optimism for energy earnings jumped the most on record over the New Year. This has made the shares inexpensive on a price-to-earnings basis,” reports Dani Burger for Bloomberg.
The Guggenheim S&P 500 Equal Weight Energy ETF (NYSEArca: RYE) is another idea to consider among energy ETFs as it was one of the group’s best-performing ETFs last year.
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.
“The bull case for earnings hinges on a couple of factors. One, that the Organization of Petroleum Exporting Countries will honor its end of the bargain to cut production by 1.2 million barrels a day, keeping supply in-check. And two, that the Trump administration will be lenient with energy companies after the appointment of former Exxon Mobile Corp. Chief Executive Officer Rex Tillerson as secretary of state,” according to Bloomberg.
For more information on the energy sector, visit our energy category.