Market Overview

Earnings May Not Be The Tonic Energy ETFs Need

Earnings May Not Be The Tonic Energy ETFs Need

Dow components Exxon Mobil Corporation (NYSE: XOM) and Chevron Corporation (NYSE: CVX), the two largest U.S. oil companies, deliver second-quarter earnings results Friday. Earnings updates from the two titans of the U.S. oil industry are often thought to be important for energy exchange-traded funds because these funds usually feature significant combined weights to Exxon and Chevron.

For example, the Energy Select Sector SPDR (ETF) (NYSE: XLE), the largest energy ETF by assets, devotes 38 percent of its combined weight to Exxon and Chevron. The 15.8 percent XLE allocates to Chevron, the ETF's second-largest holding, is more than double the fund's exposure to its third-largest holding.

Year to date, XLE is down 12.5 percent, underscoring the point that energy is the worst-performing sector in the S&P 500 this year. That could also be a reminder that investors should be careful if they are betting earnings will boost the sector over the near term.

Declining Estimates

Some big-name XLE components have already delivered second-quarter results and the overall theme of second-quarter earnings estimates for the energy sector has not been encouraging because those estimates have been declining.

“The current mean EPS estimate for Exxon Mobil for Q2 2017 is $0.84, which is below the mean EPS estimate of $0.89 on June 30 and below the mean EPS estimate of $0.99 on March 31,” according to FactSet. “The current mean EPS estimate for Chevron for Q2 2017 is $0.86, which is below the mean EPS estimate of $0.98 on June 30 and below the mean EPS estimate of $1.13 on March 31.” 

While earnings estimates have been pared for Exxon and Chevron, those companies are not the only energy sector offenders when it comes to reduced earnings estimates.

“In fact, 25 of the 34 companies in the sector (74%) have recorded a decline in their mean EPS estimate for the second quarter since June 30,” said FactSet. “As a result, the earnings growth rate for this sector has fallen to 332.1% today from 390.5% on June 30. This marks the largest drop in earnings growth of all eleven sectors since the end of the second quarter.”

Losing Patience

Data indicate investors are finally giving up on energy ETFs. For example, XLE has bled $665.5 million in assets since the start of the third quarter, a total surpassed by just six other ETFs. On a related note, the United States Oil Fund (NYSE: USO) has lost almost $524 million, a worse total than all but eight ETFs include XLE.

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