Top Ranked Energy ETF in Focus: XLE - ETF News And Commentary

Zacks Investment Research
Posted: May 21, 2013 12:30 PM

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 well.

The current boom in oil production shows little signs of waning, which should strengthen energy ETFs looking forward.  Also, strong earnings numbers from energy companies should also be credited for the recent surge in energy funds.

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 (XLE). 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 near term.

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 High.

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 see all 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 (XLE)

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 15.04 for SPDR S&P 500 ETF (SPY).

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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