Friday July 13, 2012
by Mark Salzinger, editor The No-Liad Fund Investor
SPDR S&P Select Energy (XLE) invests in what we consider to be the cheapest sector of the U.S. market.
Investor expectations are low for energy stocks, the stock prices of which are likely to recover if their operating results are even only a little better than Wall Street expects.
Concerns about the global economy have soured investors on energy, which was among the worst-performing sectors of the market in the first half of 2012. Despite poor recent performance from energy equities, the potential exists for big gains from this sector.
If/when uncertainty abates concerning the situations with Europe’s debt problems, slowing economic growth in China/India and even the economy in the U.S., energy has a good chance to outperform the broad market.
For investors, prefer the broad energy ETFs for pure exposure to energy stocks. The main reason is that the ETFs have performed better than energy mutual funds.
In fact, the generally poor performance of energy stock funds is a classic example of why ETFs can be useful: when designed well, they provide pure, ultra-low cost exposure to well-defined segments of the markets that sometimes are underserved by traditional mutual funds.
Among broad energy ETFs, we prefer SPDR S&P Select Energy. Compared to the other sectors, the expectations for energy stocks are very pessimistic, auguring for outsized future gains.
The P/E of the SPDR S&P Select Energy ETF of only 11.2 is less even than the P/E (11.9) of the financial services sector, which is, of course, at much more risk of financial upheaval.
Some investors might be concerned with the top-heavy nature of SPDR S&PSelect Energy, as Exxon Mobil accounts for 20% of the assets, while Chevron grabs another 16%.
Though 36% is certainly a lot for just two stocks, it adds risk to the ETF only if something like the oil spill that befell BPlast year happens in the future to Exxon Mobil or Chevron.
Otherwise, the incredibly strong finances and operating performances of these two behemoths serve to lower the risk of the ETF.
All told, SPDR S&P Select Energy includes more than 40 stocks. About 80% of the assets reside in producers; the oil services companies account for most of the remainder. This seems reasonable.
Learn more about this financial newsletter at Mark Salzinger's The No-Load Fund Investor.