Behind the Rebound in Energy ETFs

Zacks

In recent years, the energy sector has been through major upheavals attributable to a series of unwanted episodes in the global economy. Starting from the oil spill in the Gulf of Mexico to the broader European debt crisis, these events have collectively resulted in huge volatility in the energy sector (Two Energy ETFs Holding Their Ground).

In fact, energy-based ETFs were hard hit during 2012 due to a sluggish oil market. For most of 2012, energy ETFs were in the red with some recovery witnessed only in the latter part of the year.

A rebound in energy prices in the second half gave some life to energy ETFs though, with some strong performances pushing the space higher. This continued in the start of 2013 only to shed most of the gains as the year progressed, thereby trailing the broader market index.

However, as oil prices have come back a bit in recent trading, some are optimistic about a broader recovery in the space heading into the summer. In fact last week the sector came out second best after technology suggesting to some that a recovery may be underway in the space.

What’s Behind the Surge?

Recently the dollar, having gained strength against other world currencies for much of 2013, has finally lost its momentum. This led to a rise in oil prices which inevitably benefited energy companies. Also, strong earnings reported by some of the oil and gas producer companies led to a rally in the S&P energy sector.

The surge in the energy sector is mainly due to a rise in U.S. oil production. The U.S. which is the largest consumer of oil has spurred energy production by leaps and bounds. This has indeed given a strong boost to energy stocks and ETFs. This is especially true for the companies engaged in the drilling and extraction of oil (Energy ETFs: Strong Start to 2013).

Also, innovative technologies along with streamlined industrialization are assisting in ramping up the production of oil in the U.S. Exploitation of resources like shale, natural gas and fossil fuel are driving investors towards the energy sector.

ETFs to Watch

The strong fundamentals in the energy sector are positively impacting Energy Select Sector SPDR Fund (XLE). XLE, after recording a very subtle return for most of the year, finally seems to be gaining strength backed by strong energy sector momentum. In fact, the ETF is just slightly behind the broader market index.

XLE is one of the most popular ways to tap the energy sector. Given the current bullish trend in oil production in the U.S., this ETF represents an effective way to capitalize on the strength as oil companies play a substantial role in the performance of the fund (read 5 Sector ETFs Surging to Start 2013).

Oil Gas & Consumables Fuels companies form 79.06% of the ETF portfolio while the rest goes to energy equipment & services. The high level of concentration in the oil sector companies could prove to be a boon for the fund if oil prices gain momentum further.

The fund since the start of the year has posted gains of 13.08%. This is a huge gain when compared with the overall 2012 gain of 5.21% (Time to Buy Energy ETFs?).

The ETF is home to 46 stocks in which it invests an asset base of $7.7 billion. The fund appears to be highly concentrated as it is 60% dependent on the top ten holdings for its performance.

In fact, two oil giants, Exxon and Chevron, take up nearly 32% of the asset base. The fund charges a fee of 18 basis points annually.

The fund is trading near its all time high. In the Tuesday trading session, the ETF touched the $80.98 mark which is a penny higher than what the fund had recorded post crisis in Mar 2011 (Three ETFs for The Energy Efficiency Boom).

Investor should also note that XLE appears to be cheap relative to the broader U.S. market as indicated by its P/E. Therefore it is pretty inexpensive compared to other industries. XLE has a P/E ratio of 13.09 as compared to the P/E ratio of 14.74 for SPDR S&P 500 ETF (SPY).

Other ETFs

iShares U.S. Energy ETF (IYE)

IYE offers a broader exposure to oil and gas companies in which Oil & Gas Producers form 74.68% of the fund while Oil Equipment, Services & Distribution companies take 25.11% of the asset base.

The fund is home to 88 securities in which it invests an asset base of $1.2 billion. The fund is heavily invested in the top ten holdings as revealed by its concentration level of 63.6% (Three ETFs With Incredible Diversification).

Among individual holdings, Exxon, Chevron and Schlumberger form the top line of the fund. All the three companies get a share of 43.57% in total in the fund. The fund charges a fee of 46 basis points. In the year-to-date period, the fund has delivered a return of 6.1%.

Market Vectors Oil Services ETF (OIH)

OIH appears to be quite popular among investors as revealed by its trading volume of more than 3 million shares a day. The fund since its inception in Dec 2011 has been able to build an asset base of $1.7 billion (Oil Bull Market Is No Place For MLP ETF Investors).

The fund appears to invest its rich asset base in a holding of 26 securities which are mostly large cap companies. However, the fund has not been able to minimize company-specific risk as 67.1% of the asset base goes towards the top ten holdings.

The fund has assigned heavy weighting to the top two holdings namely Schlumberger Ltd and Halliburton Co. The allocation to the two companies stand at 27.7%. The fund charges a fee of 35 basis points annually.

The performance of the fund after the recent rise in oil production has been striking. The fund delivered a return of 15.87% in the year-to-date period.

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