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.
Related: Energy ETFs Are Back on Trend
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.
Of course, oil prices are a major issuer for investors considering energy stocks or ETFs such as IYE.
“Since late 2015, weekly changes in crude oil have accounted for more than 50% of the variation in weekly returns. This helps explain why these sectors have performed so well of late: Both interest rates and crude oil have risen sharply in recent weeks,” according to BlackRock.
For more information on the oil market, visit our oil category.