Energy Sector ETFs are underperforming broad market benchmarks. Is this a temporary phenomenon or a structural trend?
The energy sector has not had a good year. Crude prices are trading on the macro story. When the economy does well, oil prices are higher and energy ETFs do well. But estimates for global output proved too rosy. Crude prices are lower on weaker demand. The massive BP environmental disaster adds to the jinx. A ban on offshore drilling and the possibility of new taxes and restrictions are creating additional uncertainty for ETF investors. Energy ETFs are sometimes attractive as a dollar or inflation hedge. But inflation is absent and the dollar is stronger.
Energy Sector ETFs such as the Enery Select SPDR (PCX:XLE) hold primarily major oil, oil gas, and oil service stocks, including drillers and refiners. Exxon Mobile (NYSE:XOM) and Chevron (NYSE:CVX) are typically among the largest holdings.
Some investors are reconsidering the high multiple that energy ETFs have garnered in recent years. But the oil spill in the Gulf was a reminder to many investors that energy companies, while immensely profitable, also involve risk.
The long-term outperformance of Energy ETFs may not be over but it has probably stalled. Energy ETFs are suffering from a lack of catalyst. There seems to be little incentive to buy energy ETFs now. Crude is not trending higher. There is little inflation. The dollar has been mixed over this period, but generally trending stronger. There is a new awareness of political and environmental risk.
For energy ETF investors and hedgers there are plenty of options for investing in energy. Up from just a handful of broad market ETFs a few years ago the sector is represented today by an impressive, even bewildering, array of products. There are a number of specialized energy ETFs, including energy sub-sector ETFs, energy strategy ETFs, and alternative energy ETFs. There are also ETFs that hold primarily commodities futures contracts and seek to track the price of oil and other refined products, finally there are leverage and specialized trading funds. The most important of these ETFs are listed below: