Don't Overlook This High-Flying Energy ETF | ETF Trends

Thanks in large part to Russia’s violent invasion of Ukraine, oil prices are soaring, helping the energy sector retain the perch attained in 2021 as the best-performing group in the S&P 500.

A slew of exchange traded funds are benefiting from that scenario, including some that are not dependent on the familiar market capitalization-weighting methodology. Check out the Invesco S&P 500 Equal Weight Energy ETF (RYE).

While RYE isn’t excessively allocated to the biggest names in the energy patch like its cap-weighted rivals, that doesn’t diminish the fund’s sensitivity to rising oil prices. Consider the following: Last Friday, RYE jumped 3.27% on volume that was nearly double the daily average, pushing its weekly gain to 9.27%. That impressive weekly performance elevates RYE’s year-to-date gain to a stellar 35.63%.

Adding to the case for RYE is the fact that soaring oil prices often lead to higher earnings for oil companies, including RYE member firms.

“Rising oil prices are helping to drive the increase in expected earnings for the Energy sector, as the price of oil increased by 27% (to $95.72 from $75.21) from December 31 to February 28. Earnings estimates for the Energy sector and the price of oil are highly correlated,” notes John Butters, FactSet vice president and senior earnings analyst.

To this point, in 2022, just three of the 11 S&P 500 sectors are seeing positive bottoms-up earnings per share revisions. Those groups are energy, real estate, and technology. However, the rate at which energy is garnering positive earnings revisions outpaces those of the real estate and tech sectors by massive margins.

Energy earnings are correlated to crude prices, and these days, that’s a boon for RYE and its member firms.

“Over the past 20 years, the correlation coefficient between the daily forward 12-month EPS estimate for the Energy sector and the daily price of oil (WTI) is 0.89 (where 1.0 is a perfect positive linear relationship). The Energy sector also recorded the largest increase of in its forward 12-month EPS estimate (+10.6%) of all 11 sectors over the first two months of the quarter,” adds Butters.

The $490.7 million RYE holds 24 stocks — two-thirds of which are classified as mid-caps, indicating that the fund is an avenue for benefiting from the size factor. Its largest holding, Occidental Petroleum (NYSE:OXY), commands a weight of just 5.63%. That’s small relative to the largest weights assigned in cap-weighted energy ETFs.

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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.