Bringing you live news and features since 2006 

Research

Weightings of underlying holdings should be considered when choosing energy ETFs.

RELATED TOPICS​

With robust demand for energy likely to continue for the foreseeable future, investors bullish on the sector over the longer term may want to consider diversifying their exposure to the group via exchange-traded funds (ETFs) that hold S&P 500 energy-sector stocks,according to S&P Capital IQ.

But before deciding on which ETF to buy, S&P Capital IQ thinks investors should understand the fine distinctions between two ETFs tracking the large-cap energy sector, one market-cap weighted, Select Sector SPDR-Energy (XLE 71 Overweight), and the other equal-weighted, Rydex S&P 500 Equal Weight Energy ETF (RYE 65 Marketweight).

Equally weighting all 42 large-cap energy stocks affords greater influence to the smaller large caps while lessening the influence of the bigger ones. In other words, mega cap ExxonMobil (XOM 78 *****) has a similar influence on investor returns in the equally weighted RYE as mid-cap stock Sunoco (SUN 36 ***), which as of November 15’s close, was worth about USD3.9 billion compared to ExxonMobil’s USD379 billion.

From a bottom-up perspective, S&P Capital IQ favors large-cap energy shares. S&P Capital IQ equity analysts have 5-STARS (strong buy) or 4 STARS (buy) recommendations on more than half of the 111 energy stocks they cover. The majority of analysts’ favorable rankings are on companies with market capitalizations of more than USD5 billion.

Investing in large-cap energy stocks offers two benefits — namely income generation and relatively lower volatility, according to S&P Capital IQ Equity Analyst Stewart Glickman, who notes that dividends make up a pretty sizeable percentage of total return in large-cap investing over the long term. For example, ExxonMobil recently yielded 2.4% while Sunoco yielded 1.6%.

Large integrated oil & gas companies, such as ExxonMobil, "are high-quality names, and those names have outperformed in down markets, such as in 2008 when the broader S&P 500 was down 37% on a total-return basis. During that time, integrated energy companies were only down about 22%, partly on a flight-to-quality theme," Glickman points out.

This is why weightings matter not only in terms of strategy, but also in terms of performance and total return. RYE had an average annual gain of 7.7% from inception in November 2006 through November 15, 2011. By contrast, the market cap-weighted XLE had an average annual gain of 10.5% since inception in December 1998.

The two offer very different yields as well. The equal-weight RYE recently yielded 0.7%, while the cap-weighted XLE recently yielded 1.6%.

What’s more, XLE has far more 4-STARS and 5-STARS names in its top 10 than does RYE.

"That is a big reason why XLE is an overweight for performance, and RYE is only marketweight," explains Glickman, who notes S&P Capital IQ’s unique ETF ranking system considers not only past performance, but also an analysis of the underlying holdings, as well as risk and cost considerations.

Of XLE’s top 10 holdings, S&P Capital IQ equity analysts have buy or strong buy rankings on nine. By contrast, RYE has only three top-10 holdings with buy rankings, and none with strong buy.

Risk and cost considerations for the underlying holding also differ between the two funds. For instance, S&P Capital IQ views favorably the S&P Quality Rankings and credit ratings of four stocks among cap-weighted XLE’s top-10 holdings. But XLE’s S&P risk assessment is neutral, as is its standard deviation. All of these inputs help the fund reach an overall marketweight risk consideration.

RYE, by contrast, receives an overall underweight risk consideration, suggesting that the fund’s top-10 holdings are riskier that XLE’s.

"It’s not surprising that XLE has a lower standard deviation because it has more exposure to higher quality names that are less buffeted by oil and gas price volatility," Glickman says.

There is also a major difference in the cost associated with owning the funds. XLE’s expense ratio is just 0.20%, which is pretty low for a sector ETF, according to Glickman. Plus, the XLE’s bid/ask spread is also seen favourably. However, RYE’s expense ratio is 30 basis points higher, at 0.50%, than XLE’s.

Concludes Glickman, "Bottom line, XLE outperforms RYE in every major category, which explains why XLE has an overweight overall ranking, and RYE’s is only marketweight."
 

Latest News

Saving and investing app, Moneybox, has doubled the number of ETFs available on the platform, in the light of ‘growing..
Global X ETFs has announced the appointment of Ryan O'Connor as its Chief Executive Officer effective as of April 8, 2024. ..
Value-driven structured credit investing firm, Angel Oak Capital Advisors, LLC, has announced the completed conversions of two of its mutual..
Confidence in the continuing strength of bitcoin and Ethereum is driving wider interest in altcoins and other digital assets, according..

Related Articles

Jeremy Senderowicz, Vedder Price
Jeremy Senderowicz, a member of the Investment Services Group at law firm Vedder Price, has witnessed a steady upswing in...
Graham MacKenzie, Toronto Stock Exchange
The evolution of ETFs has been a multi-decade experience for Toronto Stock Exchange says Graham MacKenzie, managing director, Exchange Traded...
Frank Koudelka, State Street Global Services
ETF data provider and ETF Express data partner, Trackinsight, has published its Global ETF Survey 2024 Report: ‘50+ Charts on...
Cryptocurrencies
Matteo Greco, Research Analyst at Fineqia International writes that bitcoin (BTC) ended the week at approximately USD52,150, showing a notable...
Subscribe to the ETF Express newsletter

Subscribe for access to our weekly newsletter, newsletter archive, updates on the site and exclusive email content.

Marketing by