Energy Stocks: Why XLE Is the Right Fit Right Now

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Whether you believe prices for energy stocks are going higher or lower in the short term, there’s no arguing they’re going higher in the long term. For this reason, many smart investors are strategically buying units of the best ETF for energy stocks, the Energy SPDR (XLE).

Energy SPDRBuying on dips is risky, but it can be instantly rewarding. For example, energy stocks slid down with oil in the recent correction, but they came out ahead of the market recovery and XLE led the way with big gains. Last Thursday, XLE jumped 5% in price, whereas the average equity energy fund gained 2.2%.

XLE also leads energy funds for longer periods. Its performance ranks puts XLE ahead of more than 80% of other energy funds for the year-to-date, one-, three and five-year returns (price). The 10-year return ranks ahead of 99% of the equity energy category.

Still, it takes a bit of courage and a smart strategy to buy an energy ETF with oil prices so uncertain. To leverage the short-term downside potential of energy stocks, investors can buy units of energy ETFs in increments and dollar-cost average down.

What Makes XLE a Top Energy ETF

Smart investors know that there are a handful of key qualities that make the best ETFs. Here’s what to look for when buying ETFs and how these key qualities relate to XLE:

  • Expense Ratio: There’s much more to ETFs than expenses but generally the lower the expense ratio, the greater edge on performance, especially in the long run. XLE’s expense ratio of 0.15% is one of the lowest in the equity energy category.
  • Benchmark Index: Most ETFs seek to track the performance of a benchmark index. Therefore ETF investors should know which index is being tracked. XLE tracks the S&P Energy Select Sector Index, which is comprised of companies found in the S&P 500 from energy-based industries including oil; gas and consumable fuels; and energy equipment and services.
  • Liquidity: An ETF’s liquidity is determined not just by its own trading volume, but also the liquidity of its underlying holdings. Thus, XLE is the most liquid energy ETF because it has the highest assets under management ($11.8 billion) and because the holdings are highly traded large-cap energy stocks. The liquidity and AUM also help drive two other key ETF qualities, which are high daily trading volumes and tighter bid/ask spreads.
  • Longevity: The age of an ETF doesn’t guarantee better performance, but it does provide assurance that the management company has valuable experience. However, this is a nonstarter when it comes to the XLE, as it’s an index fund — hence, there’s no active management to worry about. But you can trust that the computers work just fine.

A Look Under the Hood of XLE

Now that we know the structural qualities that make XLE an outstanding energy ETF, let’s take a look under the hood to see what you’re buying.

XLE is a pure energy ETF with regard to portfolio holdings, which are 100% energy stocks, diversified among various industries that comprise the sector, including integrated oil and gas firms (32% of assets), oil and gas exploration and production firms (28%), equipment and services companies (17%), storage and transportation firms (10%), refiners (10%), and coal and consumable fuels companies (1%).

Tracking the S&P Energy Select Sector Index means that all of the holdings are large-cap stocks, 99% of which represent energy firms in North America. Top holdings include Exxon Mobil (XOM), Chevron (CVX), Schlumberger (SLB) and Kinder Morgan (KMI).

In addition to top performance and diverse exposure to large-cap energy stocks, investors looking for income will like the 3.01% yield.

Bottom Line

Smart ETF investors know that the best ETFs have a winning combination of tight index tracking, low expenses, high liquidity and a history of category-beating performance. XLE has all of these top qualities. And to keep a lid on market risk, XLE is broadly diversified, with high-quality, dividend-paying large-cap energy stocks spread among several subsectors within the energy sector.

XLE may not be ideal as a top holding for most investor portfolios but it does make for a solid satellite holding, and now is arguably a good time to cautiously but consistently dollar-cost average into more units for a long-term play.

As of this writing, Kent Thune did not personally hold a position in any of the aforementioned securities. However he holds XLE in some client accounts. His No. 1 holding is his privately held investment advisory firm in Hilton Head Island, SC. Under no circumstances does this information represent a recommendation to buy or sell securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/09/best-etf-energy-stocks-xle/.

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