After surging last year and placing as one of 2016’s best-performing sectors, the energy patch is struggling to start 2017.
Some market observers believe that could spell opportunity for the S&P 500’s seventh-largest sector weight and exchange traded funds, such as the Energy Select Sector SPDR (NYSEArca: XLE), the largest equity-based energy exchange traded fund.
Energy is one of a small amount of sectors that still trades at a noticeable discount relative to 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.
Although XLE and other energy ETFs are currently lagging the broader market, some investors believe that situation will not last for long and are nibbling at energy funds.
Stacey Gilbert, head of derivatives at Susquehanna, told CNBC “that $4 billion has flowed into energy-focused exchange-traded funds since the U.S. election, though outpaced by sectors like financials and utilities that investors favored in so-called ‘Trump trades.’”
Energy’s 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.
Notable is the fact that February marks the start of a multi-month stretch that is considered the seasonally strong period for the energy sector.
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).
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.
For more information on the energy sector, visit our energy category.