The Energy Select Sector SPDR Fund (NYSEArca: XLE) and other energy exchange traded funds are still facing plenty of challenges, but some market observers view the sector as an interesting value proposition.
XLE seeks to provide investment results that correspond generally to the price and yield performance of publicly traded equity securities of companies in the Energy Select Sector Index, which includes securities of companies from the following industries: oil, gas and consumable fuels; and energy equipment and services.
Some data points indicate sell-side analysts remain bullish on energy stocks, including some XLE components. Valuation may be one reason why. The recent sell-off may have opened up a potential buying opportunity for bargain hunters, especially in the oversold energy sector.
“Periods of rising energy prices and a rising SPX have tended to be extremely bullish for energy equities but the sector has struggled amid fears over its long-term viability. Notwithstanding the long-term headwinds facing the sector, its underperformance relative to the market amid the recovery in crude prices presents an opportunity,” according to Seeking Alpha.
Hope for XLE
Incorporating sector-based investment strategies can help investors align and adjust their investment portfolios based on macroeconomic or thematic trends, such as the increased adoption of clean energy and declining interest rates, shifts in stock fundamentals, or technical indicators, such as momentum.
“The ratio of the XLE over the SPX has tended to closely track the real oil price over the past few decades,” notes Seeking Alpha. “Based on this close historical correlation, the recent recovery in crude oil suggests the XLE/SPX ratio should be trading more than double current levels. As the recent recovery in oil prices feeds through into a recovery in earnings, we should see XLE begin to outperform.”
There are some other factors in XLE’s favor. On the supply side, Iraq said it would cut output by a further 400,000 barrels per day in August and September to compensate for overproduction in the past three months in a bid to comply with its share of cuts set out by the Organization of Petroleum Exporting Countries and its allies, or OPEC+.
“The XLE tends to be roughly three times more volatile than the SPX meaning that an equally-weighted long-short position could underperform in the event of a broad equity market decline,” according to Seeking Alpha.
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