ETF Trends
ETF Trends

Investors are all too familiar with the energy sector’s 2017 tale of woe. The seventh-largest sector weight in the S&P 500, the energy sector is also, by far, the worst-performing group in the benchmark U.S. equity index this year.

The Energy Select Sector SPDR (NYSEArca: XLE), the largest exchange traded fund dedicated to energy equities, is down 12.6% year-to-date. However, XLE is higher by 2.2% over the past month, prompting some speculation the energy sector and the related ETFs could be on the mend.

Investors considering ETFs such as XLE and rival ETFs such as the Fidelity MSCI Energy Index ETF (NYSEArca: FENY) and the Vanguard Energy ETF (NYSEArca: VDE) need to again monitor oil production data and credit issues at smaller energy producers.

Obviously, production is a key element in the decision-making process regarding energy investments. Currently, oil investors face conflicting reports regarding output. For example, Venezuela’s crude output is plunging to multi-year lows while Algeria is looking to boost production.

While demand has yet to catch up to elevated supplies, rebounding economies in Europe and steady economic growth in the U.S. could at least keep oil prices steady around current levels in the second half of 2017.

“Over the last several months the relative performance of energy stocks has dramatically deviated from the price of the commodity, as shown by the blue line falling far under the level of the red line. In other words, energy stocks have underperformed by far more than the correlation with oil would suggest they should have. This provides an opportunity for investors,” reports ETF Daily News.

Related: A Commodities Call for the Remainder of 2017

While OPEC is cutting back to alleviate price pressures, U.S. fracking companies could jump to capitalize on the windfall as crude oil prices jump back above $50 per barrel – according to some estimates, shale oil producers can get by with oil at just over $50 per barrel due to advancements in technology and drilling techniques that have helped cut down costs.

“If oil prices were to move to $60/bbl and the energy sector reverted back to its relative performance trend line, energy would outperform the broad market by 25%,” according to ETF Daily News.

Investors have pulled nearly $666 million from XLE since the start of the current quarter.

For more information on the oil market, visit our oil 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.