The Energy Select Sector SPDR (NYSEArca: XLE), the largest equity-based energy exchange traded fund, was one of last year’s best-performing sector ETFs, but XLE and comparable energy ETFs could face some challenges in the near-term.
With the arrival of the first quarter, an interesting dynamic is at play. Energy stocks historically start gaining momentum in the middle of the first quarter with that trend having the potential to last deep into the second quarter. 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).
U.S. equities are on their way toward the ninth year of an extended bull market rally that has elevated valuations in many segments of markets. Nevertheless, exchange traded fund investors may still find some opportunities in some targeted sectors. Energy is one of a small amount of sectors that still trades at a noticeable discount relative to long-term averages. Still, some investors urge caution with the group.
The energy sector is just one of two S&P 500 sectors that currently trades at a noticeable discount to its long-term averages.
Additionally, the energy sector is usually among one of the largest sector weights in value ETFs, underscoring the point that the group is attractively valued relative to some defensive sectors, which trade at lofty multiples.
“In a note Monday, Miller Tabak managing director Matt Maley said the XLE is nearing a critical multiyear trend line that if broken could mean the energy sector ‘is getting quite close to a compelling decline,’” reports CNBC.
For those seeking a hedge against further weakness in the energy sector, the ProShares Short Oil & Gas (NYSEArca: DDG) tries to reflect the inverse, or -100%, daily performance of the Dow Jones U.S. Oil & Gas Index.
The UltraShort Oil & Gas ProShares (NYSEArca: DUG) takes two times the inverse, or -200%, daily performance of the Dow Jones U.S. Oil & Gas Index. More aggressive traders can take a look at the Direxion Daily Energy Bear 3X Shares (NYSEArca: ERY), which reflects three times the inverse, or -300%, daily performance of the energy select sector index
“In addition, some strategists noted, futures traders’ crude oil positions as expressed in commitment of trader data are at historic extremes, with their longest positions on record,” according to CNBC.
For more information on the energy sector, visit our energy category.