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An ETF For Energy Earnings Surprises

January 25, 2016 7:33 am
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The energy sector, the seventh-largest sector weight in the S&P 500, was the worst-performing group in the benchmark U.S. equity in index in 2014 and 2015. Prior to last week, oil prices and energy equities were doing little to lead investors to believe this year would bring better things for the energy sector.

As it is, the S&P 500 Energy Index is down more than 7 percent to start 2016. However, there could be some reasons for investors to start warming to exchange traded funds such as the Fidelity MSCI Energy Index ETF (NYSE: FENY). The primary reason being many analysts and market observers believe the average oil price for 2016 will be much higher than last Friday's close of $32.35 per barrel.

“Over the past four days, the price of crude oil (NYM $/bbl) has closed the day below $30.00. This marked the first time the price of oil has closed below $30.00 since 2003. Based on yesterday’s closing price of $29.53, the price of oil is now 20% below the closing price on December 31, 2015, 45% below the closing price on December 31, 2014, and 70% below the closing price on December 31, 2013. Given the sharp decline in 2015, do analysts believe the price of oil will reverse course and increase during 2016?," said FactSet in a recent note.

Related Link: A One-Stop ETF For Asset Allocation Strategies

A Closer Look

The $282.2 million FENY debuted in October 2013 as part of Fidelity's 10-ETF lineup of sector funds. With an expense ratio of just 0.12 percent per year, FENY is the second-least expensive equity-based energy ETF on the market today and cost-conscious investors can realize additional savings by trading FENY on Fidelity's platform because the issuer offers a broad swath of ETFs on a commission-free basis.

Like other market capitalization-weighted energy ETFs, FENY features a significant combined weight to Dow components Exxon Mobil Corporation (NYSE: XOM) and Chevron Corporation (NYSE: CVX). Those stocks combine for 39.5 percent of FENY's weight. Other top 10 holdings in the ETF include Occidental Petroleum Corporation (NYSE: OXY) and ConocoPhillips (NYSE: COP).

Oil Will Reverse Course

"The answer is yes. The estimated average price of crude oil for Q1 2016 is $42.29 (based on estimates from 51 contributors). This estimate is above the average price of crude oil for Q4 2015 ($42.15). Going forward, the estimated average price for crude oil is expected to increase sequentially each quarter during the course of 2016. For Q2 2016, the estimated average price is $45.19. For Q3 2016, the estimated average price is $49.59. For Q4 2016, the estimated average price is $52.54," said FactSet.

The good news for ETFs such as FENY is that although average oil price forecasts for this year are still well below the high market prices seen a couple of years ago, earnings are expected to improve. At the very least, FENY's holdings should see decreased earnings contractions this year.

"The estimated earnings decline for the S&P 500 Energy sector for Q1 2016 is -62.4%, which is a smaller year-over-year decline in earnings relative to the estimate for Q4 2015. Going forward, the estimated year-over-year declines in earnings for the S&P 500 Energy sector are expected to continue to decrease sequentially each quarter during the course of the year. For Q4 2016, analysts are actually projecting year-over-year growth in earnings of 64%," adds FactSet.

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