by Mark Salzinger, editor The No-Liad Fund InvestorSPDR 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.