No Energy Enthusiasm For This ETF

The energy sector's struggles this year are widely documented, and that includes those of the Energy Select Sector SPDR XLE. XLE, the largest equity-based energy exchange-traded fund by assets, is down 6.8 percent, a showing that is particularly alarming when considering the S&P 500 is up 5.7 percent year-to-date.

2017's Energy Backdrop

The energy sector was one of last year's best-performing groups, but energy equities have scuffled a bit to start 2017 as oil prices have lagged. Concerns that some members of the Organization of Petroleum Exporting Countries may not abide by the cartel's output reduction plan are among the reason's oil prices are modestly lower.

With energy, the seventh-largest sector weight in the S&P 500, lagging, it is not surprising that finding bullish views on the group is somewhat difficult. XLE is one of several of the sector SPDR ETFs rated underweight by AltaVista Research. However, the research firm is particularly unimpressed by XLE at the moment.

Momentarily Unimpressed?

“On the other side, Energy (XLE) remains our least favorite sector, and is also the worst performing sector both year-to-date and since the election,” said the research firm in a recent note. “And with renewed pressure on oil prices in recent days it doesn’t seem like sentiment is going to turn around in the near future.”

Energy is a considered a cyclical, high beta sector. As such, XLE is usually more volatile than the broader market.

Over the past decade, XLE's standard deviation is almost 50 percent higher than that of the S&P 500 and over that past several years, that chasm has grown as XLE has been nearly twice as volatile as th broader market over the past three years.

The weighted average market value of XLE's lineup is $135.7 billion, a market cap not often associated with volatility. Likewise, the ETF allocates almost 39 percent of its combined weight to Dow components Exxon Mobil Corporation XOM and Chevron Corporation CVX, two stocks investors do not often perceive as volatile.

“Investors are looking for a big rebound in profits this year in the wake of OPEC's production cuts, and Energy stocks might be attractive if the lousy profitability for 2015–17E is temporary rather than a 'new normal,'” said AltaVista. “But oil prices are again under pressure as domestic production rebounds, and the Trump administration's pro-production stance could keep a lid on prices longer term. Currently Energy has the lowest rating of any sector.”

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