Assessing Demand For Energy ETFs

The Energy Select Sector SPDR (ETF) XLE is this year's best performer among the sector SPDR exchange-traded funds. XLE, the largest equity-based energy ETF by assets, is higher by 18.7 percent, an advantage of about 560 basis points over its technology and utilities counterparts.

XLE and the energy sector could be drawing renewed interest as investors seek out what they perceive to be the last bastions of value in one of the longest bull markets in U.S. history.

Energy ETFs

“The energy sector remains the second most inexpensive segment among the ten major S&P 500 sectors, based on the relative valuation measure: the price-to-book (P/B) ratio [...] the energy sector P/B ratio is currently 30 percent less than that of the S&P 500, and it is close to its 10-year low,” according to State Street.

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However, that does not mean energy, the seventh-largest sector weight in the S&P 500, is overwhelming all market participants. In fact, some are underwhelmed by the group.

Some More Specifics

“Energy stocks have been helping lead the S&P 500 higher in 2016, with the sector rising 11 percent year to date through September 23. In addition, demand for energy ETFs has been strong, with global inflows of $3 billion year to date through September 23, while financials and technology sector products experienced outflows. However, S&P Global Market Intelligence recommends investors have an underweighted stake in the sector,” said S&P Capital IQ in a note out Tuesday.

Chevron Corporation CVX, XLE's second-largest holding, is one of 12 Dow stocks sporting year-to-date gains of 10 percent of more, but not all energy ETFs are delivering on par with XLE. For example, the iShares Dow Jones US Oil Equip. (ETF) IEZ is up just 1 percent this year. That ETF devotes 30.7 percent of its combined weight to Schlumberger Limited. SLB and Halliburton Company HAL.

While investors have poured over $1.4 billion in new money into XLE this year, IEZ has seen $46.1 million in departures.

“Stewart Glickman, head of energy equity research for S&P Global Market Intelligence, is negative on the fundamentals of the sector. He sees building crude inventories and an expanding rig count pointing to a further weakening in oil prices. In addition, he thinks the valuations of many energy companies are stretched,” added S&P Capital IQ.

The research firm has underweight ratings on XLE and IEZ.

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Posted In: energyS&P Capital IQSPDRSPDR ETFsState StreetStewart GlickmanSector ETFsShort IdeasCommoditiesTop StoriesMarketsTrading IdeasETFs