A Rebounding Smart Beta Energy ETF Play

With oil prices sliding, it is not surprising that the energy sector and its related exchange traded funds are struggling. However, some parts of the energy sector take oil’s struggles particularly hard. That includes exploration and production stocks and ETFs.

The PowerShares Dynamic Energy Exploration & Production Portfolio (NYSEArca: PXE), a smart beta spin on exploration and production names, is down 20% year-to-date, putting the ETF in a technical bear market. However, PXE is higher by nearly 5% over the past week. PXE, which is nearly 12 years old, tracks the Dynamic Energy Exploration & Production Intellidex.

“The Intellidex Index thoroughly evaluates companies based on a variety of investment merit criteria, including: price momentum, earnings momentum, quality, management action, and value. The Underlying Intellidex Index is composed of stocks of 30 U.S. companies involved in the exploration and production of natural resources used to produce energy,” according to PowerShares.

Given the historical sensitivity of exploration and production names to oil prices, it would stand to reason that lower oil output would benefit the industry. While the Organization of Petroleum Exporting Countries (OPEC) has moved to trim output, U.S. shale producers are boosting production as highlighted by the rising rig count in the U.S.

“Exploration, production and service company valuations are near historic lows based on our analysis, trading at a price-to-book (P/B) multiple of 0.55. This compares with an average P/B of 0.88 for the sector using data all the way back to 1952,” said Invesco in a recent note.