After racing higher last year, the Energy Select Sector SPDR (NYSEArca: XLE), the largest equity-based energy exchange traded fund, is off just over 4% this year while the S&P 500 is higher by more than 6%.
The laggard status from energy, the S&P 500’s seventh-largest sector weight, could be a sign for investors to take a closer look at the group and ETFs such as XLE.
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.
“There’s a plausible case to be made that investors are selling energy stocks for reasons which don’t really add up. If so — and the insiders are confirming this — then the energy sector is a buy,” reports Michael Brush for MarketWatch.
Another way of looking at that scenario is that while retail investors are taking profits in or growing frustrated with energy stocks, the executives and other insiders running these companies are buying up shares. There is usually only one reason insiders buy shares of their company: Because they believe the stock is heading higher.
Rivals to XLE include the Fidelity MSCI Energy Index ETF (NYSEArca: FENY) and the Vanguard Energy ETF (NYSEArca: VDE), which are two of the least expensive energy sector ETFs.
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.
“First, as U.S. producers cut back over the past few years, they naturally kept their best wells online. Now, as they add production they are bringing on less efficient wells, or “low grading.” And service companies are going to continue to hike prices, reversing concessions made during the bad days, points out Credit Suisse energy analyst Jan Stuart,” reports MarketWatch.
Year-to-date, investors have added nearly $702 million to XLE.
For more information on the energy sector, visit our energy category.