Even with the benefit of a recent rally, the energy sector remains the worst-performing group in the S&P 500 this year, but that does not mean investors should gloss over the sector.
The $1.1 billion iShares U.S. Energy ETF (NYSEArca: IYE) is down 8.3% year-to-date, but is among the equity-based energy ETFs offering investors a value proposition.
Investors should note that IYE and other cap-weighted energy ETFs usually devote 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. IYE devotes almost 40% of its combined weight to Exxon and Chevron.
With earnings season quickly upon us, the recovering oil prices may help support revenue and earnings growth in the energy sector. According to FactSet data, energy companies int he S&P 500 Index is expected to reveal a 17% year-over-year revenue growth and 108% year-over-year earnings growth, with all segments of the sector expected to report strong earnings except oil and gas equipment and services.
“Energy in particular appears inexpensive relative to the broader market. Since 1995 the S&P 500 energy sector has traded at approximately a 17% discount to the broader market. Today that discount is nearly 40%,” according to a note from BlackRock.