Demand Soars for Energy ETFs

ETF Trends

Buttressed by the sector’s status as the second-best performer in the S&P 500 this year and geopolitical factors, energy exchange traded funds have been in big demand in 2014.

As of June 26, ETFs “devoted to energy stocks have attracted $6.68 billion in fresh money this year, the most among 12 categories in the $289 billion market for sector ETFs,” reports Jim Polson for Bloomberg.

One of the leaders has been the Energy Select Sector SPDR (XLE) . The largest equity-based energy ETF by assets, XLE has attracted nearly $3.2 billion in new assets this year, more than any other sector ETF. In just the second quarter, XLE has pulled in almost $2.3 billion in new assets. [Energy ETFs Dominate Sector Flows]

Said another way, the second-quarter inflows for the Utilities Select Sector SPDR (XLU) and the Industrial Select Sector SPDR (XLI) would need to be combined to reach a number greater than the new capital allocated to XLE.

Energy ETFs have rewarded investors for their devotion to the sector. Of the top-25 non-leveraged ETFs over the past three months, 13 are either equity-based energy funds or ETFs focusing on master limited partnerships. That group of 13 does not include several Russia ETFs, which have recently been boosted by higher oil prices. [Caution Needed on Russia ETFs]

Investors’ affinity of energy ETFs has not been limited to cap-weighted funds such as XLE that focus primarily on the largest integrated oil companies like Exxon Mobil (XOM) and Chevron (CVX).

The equal-weight and often volatile SPDR S&P Oil & Gas Exploration & Production ETF (XOP) has pulled in over $131 million this quarter while the rival iShares U.S. Oil & Gas Exploration & Production ETF (IEO) has brought in almost $75 million in new assets.

Oil services stocks and ETFs have not been left behind by the energy rally. The Market Vectors Oil Service ETF (OIH) is one of the second quarter top industry ETFs with a gain of over 14%. OIH’s rivals, the iShares U.S. Oil Equipment & Services ETF (IEZ) and the SPDR Oil & Gas Equipment & Services ETF (XES) , have pulled in a combined $61 million this quarter. [A Different Kind of Oil Services ETF]

Even with the sector’s rally, energy is not expensive compared to the broader market. The average 12-month trailing price-to-earnings ratio for the S&P Energy Index is 16.77 compared to 17.93 for the S&P 500, according to Bloomberg.

The energy sector’s status as a viable dividend destination has also increased its allure. Exxon and Chevron, the two largest U.S. oil companies, yield 2.7% and 3.2%, respectively. However, investors can do even better with international energy stocks. The SPDR S&P International Energy Sector ETF (IPW) yields 3%, or 130 basis points above XLE. [Don't Forget International Energy ETFs]

Energy Select Sector SPDR

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