The Energy Select Sector SPDR (NYSEArca: XLE), the largest exchange traded fund dedicated to energy equities, continues slumping and is down 3.3% this week, underscoring the point that plenty of concerns and questions linger for the energy sector.
Valuation concerns for the energy sector come even as the sector is featured prominently in an array of value ETFs. However, the sector looks more like a value trap than a legitimate value play over the near-term.
Rig counts have recently ticked higher and with credit and earnings issues improving for some U.S. shale drillers, those companies may seize the opportunity to exploit higher pricing in the near-term. Some traders are not convinced and caution about betting on an energy sector rebound.
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.
“The oil decline continues. Amid fresh supply worries, crude oil futures fell to $42.05 per barrel on Wednesday, their lowest level since August of 2016. That decline sent the popular XLE energy sector ETF to its lowest level in more than a year,” reports CNBC.
On a year-to-date basis, investors have been loyal to XLE in spite of the ETF’s many trials and tribulations. Investors have poured nearly $1.1 billion into the ETF this year. While XLE has continued slumping in the second quarter, investors have allocated nearly $154.1 million to fund during that period.
Some analysts believe the energy sector can deliver upside for investors later this year. Energy is one of a small amount of sectors that still trades at a noticeable discount relative to long-term averages. Additionally, the energy sector is usually among one of the largest sector weights in value ETFs, underscoring the point that the group is attractively valued relative to some defensive sectors, which trade at lofty multiples.
“Despite promises of lowering production and inventory, we haven’t seen those come to fruition,” said S&P Global portfolio manager Erin Gibbs in an interview with CNBC. “I’m watching if the energy sector can remain stable despite oil dropping below 45 dollars.”
For more information on the oil market, visit our oil category.