The energy sector, after facing a terrible 2012, is finally on
the rebound in 2013 largely due to a rise in oil production in
the U.S. The sector started the year on a strong note but lost
its momentum later. However, it seems that the sector has again
gained strength and is riding on strong fundamentals (
Behind the Rebound in Energy ETFs
A remarkable rise in oil production in the U.S. once again
lured the global energy firms to the American market. If the
current trend continues, the U.S. may become the world's biggest
producer of oil five years down the line. In fact, the U.S. is
expected to start exporting natural gas by the end of the decade,
and by 2035, the U.S. is poised to be "energy independent" as
The current boom in oil production shows little signs of
waning, which should strengthen energy
looking forward. Also, strong earnings numbers from energy
companies should also be credited for the recent surge in energy
In light of the above discussion, the U.S. energy sector
appears to be another lucrative opportunity to invest in 2013. It
is a sector with strong fundamentals and low valuations, which
suggests that it could be primed to perform well in the coming
months as well (
3 Energy ETFs for America's Production Boom
If the market continues with its recent rally, the energy
sector is certain to be a beneficiary. And with the boost in oil
production capacity by most drillers, the U.S. will once again
become a leader in energy development.
So investors seeking to ride on the solid fundamentals and
growth prospects of the sector can look to invest in
Energy Select Sector SPDR Fund (
. Currently, we have a Zacks ETF Rank of 1 or 'Strong Buy' on the
fund, so we believe that the ETF will outperform its peers in the
About the Zacks ETF Rank
The Zacks ETF Rank provides a recommendation for the ETF in
the context of our outlook for the underlying industry, sector,
style box, or asset class. Our proprietary methodology also takes
into account the risk preferences of investors. ETFs are ranked
on a scale of 1 (Strong Buy) to 5 (Strong Sell) while they also
receive one of three risk ratings, namely, Low, Medium, or
The aim of our models is to select the best ETFs within each
risk category. We assign each ETF one of five ranks within each
risk bucket. Thus, the Zacks Rank reflects the expected return of
an ETF relative to other products with a similar level of risk
the Top Ranked ETFs
For investors seeking to apply this methodology to their
portfolio in the energy sector, we have taken a closer look at
the top ranked XLE below:
Energy Select Sector SPDR Fund (
This fund seeks to match the price and yield of the S&P
Energy Select Sector Index, before fees and expenses. The fund
holds 45 stocks in its basket and is somewhat concentrated from
an individual security perspective (
Top 5 Best Performing Energy ETFs
From a sector perspective, Oil Gas & Consumables Fuels
companies form 80% of the ETF portfolio while the rest goes to
energy equipment & services. The high level of concentration
in the oil sector companies has been a boon for the fund at this
point of time.
From an individual holdings perspective, the product puts
about 60% of assets in the top 10 holdings. In fact, two oil
giants, Exxon and Chevron, take up nearly 32% of the asset base.
The fund charges a fee of 18 basis points annually.
While the ETF focuses on large caps that account for 93%
share, mid caps takes the remaining portion in the basket, with
no allocation made to small caps. The fund has a nice mixture of
blend, growth and value securities, ensuring broad
diversification in terms of style (
The Best Investing Style ETF This Fiscal?
The product manages an asset base of over $7.6 billion and
trades at volume levels of more than 12 million shares a day.
This suggests that bid ask spreads are extremely tight. Further,
it is less volatile as indicated by its annualized standard
deviation of 15.3%.
XLE after recording a very subtle return for most of the year
finally seems to be gaining strength backed by strong energy
sector momentum. In fact, the ETF is just slightly behind the
broader market index.
The fund since the start of the year has posted gains of
13.09%. This is a huge gain when compared to the overall 2012
gain of 5.21% (
Time to Buy Energy ETFs?
Investors should also note that XLE appears to be cheap
relative to the broader U.S. market as indicated by its P/E.
Therefore it is pretty inexpensive compared to other industries.
XLE has a P/E ratio of 13.17 as compared to the P/E ratio of
SPDR S&P 500 ETF (
So for investors seeking a possible surging play, XLE could be
worth a closer look. Not only is the fund a top Ranked ETF, but
it has strong fundamentals and valuations as well, suggesting
that now could be the time for this energy sector ETF.
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