This could be a big week for energy sector exchange traded funds as Exxon Mobil (NYSE: XOM) and Chevron (NYSE: CVX) are set to report earnings Friday, July 28.
However, it may not be all good news. The current earnings-per-share estimate for XOM for Q2 2017 is $0.84, or below the mean EPS estimate of $0.89 on June 30 and below the mean EPS estimate of $0.99 on March 31, writes John Butters for FactSet. Additionally, the current mean EPS estimate for CVX for Q2 2017 is $0.86, compared to the mean EPS estimate of $0.89 on June 30 and below the mean EPS estimate of $1.13 on March 31.
This may spell trouble for the Energy Select Sector SPDR (NYSEArca: XLE), the largest equity-based energy exchange traded fund, which has a 22.3% tilt toward XOM and 15.7% CVX.
Traders have increasingly lowered expectations on the energy sector this earnings season. Since Jun 30, 25 of 34 energy companies in the S&P 500 have recorded a decline in their mean EPS estimate for the second quarter.
“As a result, the earnings growth rate for this sector has fallen to 332.1% today from 390.5% on June 30. This marks the largest drop in earnings growth of all eleven sectors since the end of the second quarter,” Butters said.
Related: U.S. Stock ETFs Mixed as Traders Weigh Earnings, Capitol Hill
Nevertheless, despite the falling earnings growth expectations, the energy sector is still expected to be the largest contributor to earnings growth for the S&P 500 as a whole. According to FactSet data, when excluding the energy sector, the blended earnings growth of the S&P 500 falls to 4.8% from 7.2%.
Traders who are wary of further weakness in the energy segment may turn to inverse ETF options to hedge against declines. For instance, the Direxion Daily Energy Bear 1x Shares (NYSEArca: ERYY) takes the -1x or -100% daily inverse performance of the Energy Select Sector Index. The ProShares Short Oil & Gas (NYSEArca: DDG) tries to reflect the inverse or -100% daily performance of the Dow Jones U.S. Oil & Gas Index.
For the risk-tolerant or more aggressive trader, the UltraShort Oil & Gas ProShares (NYSEArca: DUG) takes two times the inverse, or -200%, daily performance of the Dow Jones U.S. Oil & Gas Index, and the Direxion Daily Energy Bear 3X Shares (NYSEArca: ERY) reflects three times the inverse or -300% daily performance of the energy select sector index
For more information on the energy sector, visit our energy category.