Oil is one of this year’s best-performing commodities, but some market observers believe there is still value in the energy sector. Broadly speaking, energy stocks and exchange traded funds (ETFs) have been solid performers this year, but those assets are lagging oil’s returns.
The iShares U.S. Energy ETF (NYSEArca: IYE) is higher by more than 18% year-to-date. In fact, by some estimates, the energy sector remains cheap. Some market observers believe the energy sector’s 2018 declines could make the sector more attractive on valuation. Last year, the energy sector experienced a short-lived rally after lengthy Organization of the Petroleum Exporting Countries (OPEC) discussions finally came to a conclusion, resulting in a larger-than-expected production cut that sent oil prices higher.
“What is more surprising is the dogged persistence of a less glamorous sector: energy,” said BlackRock in a recent note. “Year-to-date the U.S. GICS Energy Sector is up 18%, beating the market by roughly 200 basis points (bps). Despite the magnitude of the recent gains, still cheap valuations and an intensifying bull market in oil suggest further upside.”
With oil prices needing positive catalysts, the ability of OPEC to lower output is critical for the commodity’s near-term fortunes. Likewise, some market observers are concerned about U.S. shale producers keeping output high as prices decline.
What’s Next for Energy Stocks
“While energy stocks are now up nearly 25% from their Christmas Eve bottom, they remain cheap relative to their history, the market and the price of crude,” according to BlackRock. “Based on price-to-book (P/B) the energy sector is still the second cheapest sector after financials. While valuations have risen from the multi-decade low witnessed last December, the sector still trades at a 49% discount to broader market.”
IYE tracks the Dow Jones U.S. Oil & Gas Index and holds 67 stocks. The fund allocates nearly 40% of its combined weight to Exxon Mobil Corp. (NYSE: XOM) and Chevron Corp. (NYSE: CVX), the two largest U.S. oil companies.
During the week starting Monday, April 22, nearly 58% of the S&P 500 Energy Index reports first-quarter earnings.
“While investors should have modest expectations for growth, the U.S. remains stable and there are tentative signs of stabilizing growth in Europe and China. Less economic anxiety removes one of the headwinds to crude prices,” according to BlackRock.
10 Cheapest Energy Equity ETFs
|Symbol||ETF Name||YTD Performance||Expense Ratio|
|FENY||Fidelity MSCI Energy Index ETF||21.07%||0.08%|
|VDE||Vanguard Energy ETF||21.28%||0.10%|
|XLE||Energy Select Sector SPDR Fund||20.57%||0.13%|
|PSCE||Invesco S&P SmallCap Energy ETF||33.18%||0.29%|
|XOP||SPDR S&P Oil & Gas Exploration & Production ETF||24.60%||0.35%|
|XES||SPDR S&P Oil & Gas Equipment & Services ETF||38.59%||0.35%|
|OIH||VanEck Vectors Oil Services ETF||31.86%||0.35%|
|FILL||iShares MSCI Global Energy Producers ETF||17.30%||0.39%|
|RYE||Invesco S&P 500® Equal Weight Energy ETF||25.85%||0.40%|
|TPYP||Tortoise North American Pipeline Fund||21.81%||0.40%|
* Assets in thousands of U.S. Dollars. Assets and Average Volume as of 2019-04-22 20:15:03 UTC. Chart via ETFdb.com
For more information on the oil market, visit our energy category.