Here's Why Energy ETFs Are Rallying

The energy sector of the S&P 500 witnessed strong gains as oil prices increased this month. The S&P 500 Energy sector is up 6.5% in September.

Crude prices are rising, as global inventories are shrinking, proving that the OPEC cuts have somewhat succeeded in achieving their target. Per the International Energy Agency (IEA), international demand is strengthening and global oil supplies are decreasing. This is expected to drive prices higher (read: ETFs to Watch on Oil Price Rise and Debt Limit Deal).

OPEC meet

The OPEC committee meets on Sep 22, 2017 to discuss the progress of the actions. After implementing production cuts amounting to as much as 1.8 million barrels a day, the OPEC is expected to discuss further actions required to ensure that oil prices regain stability.

The decrease in global stockpiles is a sure positive for OPEC. Per a Bloomberg article citing IEA, excess inventories have declined 28% against their five-year average so far this year. Moreover, Iraq has extended a proposal to reduce supply by further 1%.

Hurricane Impact and Demand

Oil prices rose as refineries along the Gulf coast reopened after being shut due to the disastrous Hurricane Harvey. The hurricane had led to the blocking of 20% of the oil refining capacity of the United States.

Owing to the hurricanes Harvey and Irma aftermath, demand is expected to decline in the near term. However, the IEA stated that global demand is robust and as and when the impacts of the hurricane cool down, the future picture for crude is expected to improve (read: Hurricane Harvey Puts These ETF Areas in Focus).

Moreover, the greenback has weakened, making dollar-denominated oil more affordable. This is in turn expected to drive demand.

Let us now discuss a few ETFs focused on providing exposure to energy equities.

Energy Select Sector SPDR Fund XLE

This fund is the most popular ETF traded in U.S. markets providing exposure to energy companies.

It has AUM of $15.8 billion and charges a fee of 14 basis points a year. From a sector look, the fund has exposures to Oil, Gas & Consumable Fuels and Energy Equipment & Services with 84.1% and 15.9% allocation, respectively (as of June 30, 2017). The fund’s top three holdings are Exxon Mobil Corp (NYSE:XOM) , Chevron Corp (NYSE:CVX) and Schlumberger Ltd (NYSE:SLB) with 22.0%, 17.4% and 7.5% allocation, respectively (as of Sep 19, 2017). The fund has lost 0.8% in a year and 12.8% year to date (as of Sep 19, 2017). It currently has a Zacks ETF Rank #4 (Sell) with a High risk outlook.

Vanguard Energy ETF (NYSE:XLE) VDE

This fund seeks to provide exposure to energy equities in U.S. markets.

It has AUM of $3.9 billion and charges a fee of 10 basis points a year. From a sector look, the fund has exposure to Integrated Oil & Gas, Oil & Gas Exploration & Production and Oil and Gas Equipment & Services with 40.9%, 25.7% and 13.9% allocation, respectively (as of Aug 31, 2017). The fund’s top three holdings are Exxon Mobil Corp, Chevron Corp and Schlumberger Ltd with 22.4%, 15.1% and 6.6% allocation, respectively (as of Aug 31, 2017). The fund has lost 0.5% in a year and 13.6% year to date (as of Sep 19, 2017). It currently has a Zacks ETF Rank #4 with a High risk outlook.

iShares U.S. Energy ETF IYE

This fund seeks to provide exposure to energy equities in U.S. markets.

It has AUM of $1.07 billion and charges a fee of 44 basis points a year. From a sector look, the fund has exposure to Integrated Oil & Gas, Oil & Gas Exploration & Production and Oil and Gas Equipment & Services with 43.0%, 25.1% and 13.5% allocation, respectively (as of Sep 18, 2017). The fund’s top three holdings are Exxon Mobil Corp, Chevron Corp and Schlumberger NV with 24.1%, 15.5% and 6.7% allocation, respectively (as of Sep 18, 2017). The fund has lost 0.95% in a year and 12.9% year to date (as of Sep 19, 2017). It currently has a Zacks ETF Rank #5 (Strong Sell) with a High risk outlook.

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