Market Overview

Energy ETFs Are Soaring, But Some Investors Lack Enthusiasm

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Energy ETFs Are Soaring, But Some Investors Lack Enthusiasm

The Energy Select Sector SPDR (ETF) (NYSE: XLE), the largest equity-based exchange-traded fund tracking the energy sector, is up more than 10 percent in the second quarter. That extends a run that has XLE up 12.5 percent year-to-date, a showing that, among the sector SPDR ETFs, has been trumped only by XLE's utilities peer.

Interestingly, even while it was falling, XLE was legitimately adding new assets. Meaning the inflows to the ETF were courtesy of buyers that were betting the fund was going to rebound, not short sellers forcing the creation of new shares.

However, in the second quarter, investors are not scurrying to energy ETFs as they were earlier this year — despite the sector's recent bullish displays.

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“The recent oil price rally has pushed the energy sector upward in both the equity and bond markets. In the second quarter so far, the S&P 500 Energy Index (equity) has returned over 9.1 percent in total return and the S&P 500 Energy Corporate Bond Index has returned over 7.3 percent. Meanwhile, the broader indices have seen more modest returns: the S&P 500 Bond Index (the debt of the S&P 500 companies) has returned 2.61 percent and the S&P 500 (TR) has returned 2.21 percent,” according to S&P Dow Jones Indices.

A Closer Looking

Since the start of the current quarter, XLE has lost nearly $75 million in assets, despite the fact that Exxon Mobil Corporation (NYSE: XOM) being one of just four Dow stocks with a quarterly gain of at least 10 percent. Exxon and Chevron Corporation (NYSE: CVX), the two largest U.S. oil companies, combine for over a third of XLE's weight.

Fascinating Focus On Oil

Interestingly, investors are favoring more volatile fare among energy ETFs. For example, the VanEck Vectors Oil Services ETF (NYSE: OIH) has raked in nearly $200 million in new assets this quarter. Oil services stocks are usually more correlated to crude prices than integrated names such as Exxon and Chevron, explaining why some investors would flock to OIH and the ETF's three-year standard deviation of 26.3 percent.

As is the case with XLE, two stocks really drive OIH's returns. Schlumberger Limited. (NYSE: SLB) and Halliburton Company (NYSE: HAL) combine for over 38 percent of the ETF's weight.

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“Yields of bonds in the S&P 500 Energy Corporate Bond Index have tumbled as bond prices have rallied. At the end of March the average yield of bonds in the index was a 5.17 percent and ended June 10th at a 3.95 percent — a 122 basis point drop. The average yields of bonds in the S&P 500 Bond Index have also fallen but only by 25 basis points during this time frame, helped in part by the inclusion of the energy bond sector,” added S&P Dow Jones.

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