Addition by Subtraction For This Broad Market ETF | ETF Trends

It’s always said that when it comes to ETFs, investors should “look under the hood” to examine ETF’s holdings. However, there are examples of what is excluded from ETF being as important as what the fund holds.

The S&P 500 Ex-Energy ETF (NYSEArca: SPXE), which provides exposure to S&P 500 companies with the exception of those included in the energy patch, can be seen as an ETF example of addition by subtraction, particularly with the energy sector struggling to start 2020.

It’s not a coincidence that with the Energy Select Sector SPDR Fund (NYSEArca: XLE) down 8.53% year-to-date that SPXE is up 4.07%. That’s good for an advantage over traditional S&P 500 ETFs.

“An investment in the S&P 500 that excludes a particular sector gives you the flexibility to tailor your core U.S. equity exposure,” according to ProShares. “It can replace a traditional S&P 500 fund, allowing you to underweight or even eliminate a sector in your portfolio.”

Sizing up SPXE

The energy market, which is viewed as a proxy for economic growth, has been among the worst hit assets in response to the growing threat of the spreading coronavirus in China and its effects on the global economy. China is the second largest economy in the world and biggest importer of oil, and many anticipated a slowdown in the emerging economy due to the disruptions form widespread quarantines that Beijing has implemented to limit the spread of the novel virus.

However, energy equities are in extended period of decline, so much so that the sector has become one of the smallest in the S&P 500. Said another way, a case can be made that SPXE is actually a fairly accurate representation of the benchmark domestic equity gauge.

Another perk of SPXE, though not necessarily by intent, is that the fund fits the bill as an environmentally conscious play. That a time when advisors and investors are increasingly warming to environmental, social and governance (ESG) strategies.

More and more investors are asking for these ESG-focused products that not only achieve target returns but also focus on topics investors care about, such as climate change or renewable energy sources.

Related: U.S. Stock ETFs Climb as Data Reflects a Strong Economy 

The news comes just as ESG is starting to make an impact in the investment arena and more interest in 2020 should follow. The challenge for these ESG funds is giving investors what they want, which is more ESG offerings, but at the same time, trying to generate a return.

In other words, SPXE could very well be at the right place at the right time in 2020.

For more on core investing strategies, visit our Core ETF Channel.

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.