After trailing the broader markets for most of the year, energy sector stocks and exchange traded funds are finally leading the charge.
Energy Select Sector SPDR Fund (XLE) has been outperforming the S&P 500 since mid-April.
The energy sector shows attractive valuations, with component holdings in the XLE at a price-to-earnings ratio of 12.45, compared to the 16.4 P/E of SPY.
The energy sector was the second-best performing sector, slightly behind technology stocks, last week as the strengthening oil market and better jobs report help push the S&P 500 to record highs. [VIX ETFs Drop on Jobs Report as S&P 500 Clears 1,600]
“The oil market has broken out and the jobs report is the biggest catalyst,” said Jeff Grossman, president of BRG Brokerage and a New York Mercantile Exchange floor trader, said in a Bloomberg article. “The stock market is strong and everything is going higher.”
“People had been a bit nervous about oil demand and economic growth,” Michael Lynch, president of Strategic Energy & Economic Research, said in the article. “This report gives people a sense that maybe the U.S. economy will not pause, but instead may accelerate in the second quarter.”
Along with the positive cyclical data that has helped the energy sector, long-term trends will continue to support these energy stocks. [Energy ETF Highest Since 2008]
“Oil, in particular, is becoming harder to find and extract,” according to Morningstar analyst John Gabriel. “Global oil production has been stagnant since 2005, even after a trillion-dollar investment by the oil and gas industry. The number of oil discoveries as well as the size of discoveries made has been declining for decades. Oil-services firms’ expertise is growing increasingly more valuable as the industry seeks to explore and extract oil from ever-more-challenging frontiers in new deep-water and even Arctic efforts.”
Other energy sector ETFs include:
- Vanguard Energy Index Fund (VDE) : up 8.9% year-to-date
- Market Vectors Oil Services ETF (OIH) : up 10.4% year-to-date
- iShares Dow Jones US Energy Sector Index Fund (IYE) : up 9.5% year-to-date
In comparing the energy sector with the broader S&P 500, XLE is finally gaining against SPY.
For more information on energy, visit our energy category.
Max Chen contributed to this article.