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Selloff in Energy ETFs May Have Gone Too Far

This article was originally published on ETFTrends.com.

Equity-based energy sector exchange traded funds are following oil prices lower, pressuring some well-known names in the group including the iShares U.S. Energy ETF (IYE) . Some market observer believe the sell-off in energy stocks may be nearing its end.

These broad energy ETF plays include a more diversified portfolio to gain exposure to oil producers. For instance, IYE includes 40.0% integrated oil gas, 28.8% oil gas exploration and production, 12.1% oil gas equipment and services, 10.0% oil gas refining and marketing, 6.8% oil gas storage and transportation, and 1.5% oil and gas drilling.

“More interestingly, although oil prices have dropped sharply in recent weeks, they have not collapsed, unlike in early 2016. West Texas Intermediate Crude (WTI) is flat year-to-date, but the global benchmark Brent is still up 6%,” said BlackRock in a recent note. “This suggests that either the recent collapse in energy shares looks overdone or oil prices have further to fall.”

On Wednesday, oil prices slipped to their lowest intraday level this year and were on track for their 12th consecutive sessions of declines after remarks from President Trump urging Saudi Arabia and the Organization of Petroleum Exporting Countries to not reduce oil production even as traders were concerned about an oversupplied market, the Wall Street Journal reports.

Value In The Energy Patch

The recent decline in energy stocks has the sector trading at depressed earnings multiples.

“Based on price-to-book (P/B) the energy sector is now trading at the largest discount to the S&P 500 since at least 1995,” according to BlackRock. “Energy stocks are currently trading at roughly a 50% discount to the broader market.”

Related: Trump Isn’t Doing Oil ETFs Any Favors

IYE tracks the Dow Jones U.S. Oil & Gas Index and holds 68 stocks. Like other traditional cap-weighted energy ETFs, IYE devotes a significant portion of its lineup to Dow components Exxon Mobil Corp. (XOM) and Chevron Corp. (CVX), the two largest U.S. oil companies. Those stocks combine for almost 39% of the ETF’s weight.

“The sector also appears unusually cheap on an absolute basis. At less than 1.7x earnings, the current valuation is the cheapest since early 2016 and is in the bottom 5% of all observations going back to 1995,” said BlackRock.

For more information on the oil market, visit our energy category.

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