The Energy Select Sector SPDR (NYSEArca: XLE), the largest equity-based energy sector exchange traded fund, has steadied in recent weeks, but the energy sector remains the worst-performing group in the S&P 500 this year. Earnings reports from some of the sector’s biggest names promise to test the near-term outlook for the group.
Rivals to XLE include the Vanguard Energy ETF (NYSEArca: VDE), iShares U.S. Energy ETF (NYSEArca: IYE) and the Fidelity MSCI Energy Index ETF (NYSEArca: FENY).
Before the open of U.S. markets Friday, Exxon Mobil (NYSE: XOM) and Chevron (NYSE: CVX), the two largest U.S. oil companies, deliver third-quarter earnings.
Investors should be aware that XLE and its aforementioned rivals allocated hefty portions of their lineups to the largest oil companies, including Dow components Exxon Mobil and Chevron along with Schlumberger (NYSE: SLB), the largest oilfield services provider. In some cases Exxon Mobil and Chevron, the two largest U.S. oil companies, combine for up to a third or more of these ETFs’ weights.
“Energy has been an earnings laggard over the course of the last several years, but the tide is finally turning for the sector as it’s now the biggest contributor to earnings growth,” Mark Tepper, president and CEO of Strategic Wealth Partners, said in an interview with CNBC.
Related: Is the Slump Over? Shifting Views on Energy ETFs
Current OPEC compliance with production cut plans remains above their historical average, and it usually takes between two to three quarters for inventories to normalize after the cuts. The challenge for energy equities is that some oil market observers see more declines coming for crude. Oil traders are concerned over how fast U.S. shale oil producers will increase production to capture the rising prices.
“Because the price of oil started so low in [the third quarter]and gradually increased throughout the quarter, we’re really not expecting to see that flow through to earnings this quarter. It will likely be next quarter,” Tepper said, according to CNBC, adding that he is looking for positive momentum across earnings reports to confirm the equities are moving “in the right direction.”
Investors have added nearly $153 million to XLE since the start of the fourth quarter, showing modest enthusiasm for the bellwether energy ETF.
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