A Big Energy ETF is Finally Perking Up

Down almost 13% year-to-date, the Energy Select Sector SPDR (NYSEArca: XLE), the largest equity-based energy exchange traded fund, and rival cap-weighted, diversified energy ETFs remain among this year’s worst-performing sector ETFs.

However, XLE posted a gain of just 1% last week and some market observers believe the fund is showing incremental signs of rebounding. 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).

Investors should be aware that XLE and its aforementioned rivals allocated hefty portions of their lineups to the largest oil companies, including Dow components Exxon Mobil (NYSE: XOM) and Chevron (NYSE: CVX) along with Schlumberger (NYSE: SLB), the largest oilfield services provider. In some cases Exxon Mobil and Chevron, the two largest U.S. oil companies, combine for up to a third of these ETFs’ weights.

“The XLE long thesis is dependent in part on crude oil remaining above its 200-DMA and prior downtrend line,” according to a Seeking Alpha analysis of the ETF. “More importantly, if crude oil achieves a close above $50.50, then many traders will re-evaluate their short bias on crude oil. Technically, crude oil is now above all key moving averages. There are other reasons to believe that crude oil will continue its upward move, such as the current differential between WTI and Brent crude.”

Current OPEC compliance with production cut plans remains above their historical average, and it usually takes between two to three quarters for inventories to normalize after the cuts. The challenge for energy equities is that some oil market observers see more declines coming for crude. Oil traders are concerned over how fast U.S. shale oil producers will increase production to capture the rising prices.