The Energy Select Sector SPDR (NYSEArca: XLE), the largest equity-based energy ETF, is up less than three percent this year, underscoring the point that energy is one of the worst-performing groups in the S&P 500.
Moreover, the sector’s weight in the S&P 500 is dwindling, down to just 4.23% as of the end of November and earlier this year, Exxon Mobil (NYSE: XOM), XLE’s largest component, fell out of the top 10 S&P 500 members for the first time ever. Still, some market observers believe the downtrodden sector is poised to bounce back.
XLE targets the Energy Select Sector Index and “seeks to provide precise exposure to companies in the oil, gas and consumable fuel, energy equipment and services industries,” according to State Street.
“In the U.S., energy stocks are having another disappointing year, capping what has been a lost decade. Energy stocks in the S&P 500 index have returned just 5% this year (including dividends), against a 28% return for the S&P 500, despite a 19% gain in crude to $56 a barrel,” reports Andrew Bary for Barron’s. “The performance is also weak over the past 10 years. The sector is bringing up the rear in the S&P 500 with a 6% annualized return, against 17.8% for the index and 22.7% for the market-leading technology sector, according to S&P. Energy is down to a record-low 4% weighting in the S&P 500 and is worth less than the market value of Apple (AAPL).”
Value In The Wreckage
One reason some investors may be revisiting XLE is that the energy sector is being viewed as a value destination and there has recently been a rotation to value away from growth.
Analysts also expect the volume of U.S. crude oil in storage should diminish in the weeks ahead before reversing course at the end of peak driving season, along with the start of the seasonal refinery maintenance period.
“Energy could surprise and emerge as one of the top sectors in the next 10 years. Stoeckle favors Chevron (CVX), ConocoPhillips (COP), BP (BP), and Total (TOT). The European stocks are particularly cheap, in part because of the divestment effort. BP stock, at $37, and Royal Dutch Shell, at $58, both trade for just 13 times projected 2019 earnings and yield 6.5%,” according to Barron’s.
The iShares Global Energy ETF (NYSEArca: IXC) provides exposure to the aforementioned U.S. and European oil majors.
For more information on the energy sector, visit our energy category.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.