Why Oil ETFs Are Beating Energy Equity Funds | ETF Trends

Oil is one of this year’s best-performing commodities, a point confirmed by some of the marquee futures-based exchange traded products with oil exposure. Entering Thursday, the United States Oil Fund (NYSEArca: USO), which tracks West Texas Intermediate crude oil futures, and the United States Brent Oil Fund (NYSEArca: BNO), which tracks Brent crude oil futures, were up 28.80% and 34.50%, respectively, year-to-date.

Compare those performances to the Energy Select Sector SPDR (NYSEArca: XLE). XLE, the largest equity-based energy exchange traded fund, is up 15.80% this year.

“The energy sector’s share of the overall market is smaller than it has been historically, but its valuation isn’t cheap, due to recent downward revisions in earnings estimates,” reports Evie Liu for Barron’s. “Nicholas Colas of Datatrek suggests in a Wednesday report that energy investors should look beyond price and valuation for other narratives to decide on a strategy for the sector.”

What Happened to Oil?

The hard fought rebound this year has also come off a steep decline. Crude prices plunged 44% from a multi-year high in early October through the nadir on Christmas Eve as investors ditched energy in response to rising pessimism over global economic growth and potentially diminished demand across a range of commodities.

The energy sector was one of the worst-performing groups in the S&P 500 in 2018, as highlighted by an annual decline of 18.20% for XLE. 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.

“Bigger large-cap tech companies can’t be solely blamed, either, since the energy sector’s share in mid-cap and small-cap indexes has been shrinking, as well,” reports Barron’s. “Energy only represents 3.9% of the S&P 400 Mid Cap Index, 4.5% of the S&P Small Cap 600 Index, and 3.8% of the Russell 2000, according to Colas.”

Have you signed up for the ETF Trends Virtual Summit on Wednesday, April 17? It’s complimentary for financial advisors (earn up to 5 CE Credits)! Register now to learn about alternative and thematic tools to better diversify client portfolios.

Still, the energy sector is beating the S&P 500 this year even as analysts ratchet down earnings and revenue estimates for the group.

“The outperformance comes even as Wall Street analysts have slashed revenue and earnings estimates for the sector,” according to Barron’s. “Analysts now expect the group to post the worst revenue growth in 2019 of any S&P 500 sector, wrote Colas, revising their outlook to a 4.7% decline from growth of 4.3% at the start of the year. For earnings, analysts now expect the sector to see a decline of 11.9% from last year, adjusted from 8.6% growth in early January.”

For more information on the energy sector, visit our energy category.

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.