The Energy Select Sector SPDR (NYSEARCA:XLE) ended the third quarter on a high note as energy finished the final week of September as the leading sector, thanks in part to rising oil and gas prices.
Oil’s positive momentum to end Q3 spilled over into Q4, with XLE jumping up 1.5% on the first trading day in October. This new energy continues to make XLE a compelling holding through the end of 2018.
Q4 Outlook for XLE
With that said, as with all of 2018, the outlook for the energy sector remains unclear for the fourth quarter. While there is uncertainty and downside pressure for oil and gas, there are positive potentialities to counter the concerns for the sector.
- Slow global growth, fuel efficiency and production have kept supplies up and prices down in recent years, but U.S. growth and increased geopolitical uncertainty are ramping up now.
- XLE has seen price volatility in 2018 but the energy sector has shown a low (and at times negative) correlation with the broader market, which arguably makes XLE a good diversification tool. In fact, XLE’s biggest days and weeks in 2018 have been some of the worst for other sectors.
- Higher U.S. oil production is a cause for concern on the supply side but the U.S. demands for other countries to cut off Iranian supplies is an offsetting factor.
While these competing forces will likely contribute to more volatility for XLE in Q4 2018, investors willing to take on relatively high market risk may find this energy sector fund an attractive addition to a diversified portfolio.
What Makes XLE One of the Best ETFs for 2018 (and Beyond)
When building a portfolio of ETFs, most investors are wise to use a structure called “core and satellite.”
As the name suggests, the structure consists of one or two core holdings, which will receive the highest allocation weights, and several satellite holdings, which will receive smaller percentages in allocation. For example, many investors use a broad market index fund, such as iShares Core S&P 500 (NYSEARCA:IVV), for the portfolio’s core holding. Then the investor will add the satellites, which may include bond funds, small- and mid-cap U.S. stock funds, foreign stock funds and sector funds.
One of the primary qualities of ETFs is the low-cost access to sectors and niche areas of the market. Whether you’re looking for short-term investment opportunities, income, growth or for diversification tools, ETFs can serve the purpose well. And while the energy sector may not be the first area of the market that comes to mind when looking for the best ETFs to buy, XLE can make a good satellite holding for diversification and it can be a good source of income.
The current yield for XLE is 2.6% and the expense ratio is 0.13%, or $13 for every $10,000 invested.
As of this writing, Kent Thune did not personally hold a position in any of the aforementioned securities, although he holds IVV and XLE in some client accounts. Under no circumstances does this information represent a recommendation to buy or sell securities.
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