Investors have heard quite a bit of this lately: The energy sector is the worst-performing group in the S&P 500. However, the struggles of the S&P 500's seventh-largest sector weight are not uniform — certainly not among the exchange-traded funds tracking group.
While ETFs that weight equities by market capitalization have drawbacks, not the least of which is exposing investors to stocks that are potentially overvalued, smart beta and fundamentally-weighted ETFs are not perfect, either. That is particularly true when markets or specific sectors tumble.
PXI's Poor Performance
Take a look at the PowerShares DWA Energy Momentum Portfolio (NYSE: PXI). That ETF is down 17.1 percent year-to-date, a loss that is 700 basis points more than that of the cap-weighted Energy Select Sector SPDR (ETF) (NYSE: XLE). As its name implies, PXI applies a momentum-based strategy to a sector that, at least for the moment, is bereft of momentum.
PXI tracks the Dorsey Wright Energy Technical Leaders Index, which “is designed to identify companies that are showing relative strength (momentum), and is composed of at least 30 common stocks from the NASDAQ US Benchmark Index,” according to PowerShares.
Currently, PXI holds 38 stocks. When applying momentum to a sector that is heavy on large-caps such as energy, the typical strategy is to trim exposure to slower-moving energy giants such as Exxon Mobil Corporation (NYSE: XOM) and Chevron Corporation (NYSE: CVX). PXI does not hold shares of Exxon and only devotes 2.8 percent of its weight to Chevron.
In fact, just a quarter of PXI's holdings are considered large caps while about 31 percent are small caps. U.S. small caps are disappointing this year, and combining that with the energy sector's struggles underscores PXI's weakness.
With its momentum-based strategy and emphasis on smaller energy stocks, it is hard for PXI to thrive when oil prices are slumping and the broader energy sector is weak. While energy was a solid performer last year, the sector has been a laggard for most of the last three years. Over that period, PXI is down 14.6 percent while the S&P 500 Energy Index is lower by 7.5 percent, according to PowerShares data.
Investors appear skittish about PXI's near-term rebound prospects. Nearly $136 million has been yanked from PXI this year, trimming the ETF's assets under management tally to about $110 million.
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