The Energy Select Sector SPDR (ETF) (NYSEARCA:XLE) started the year near the top of our list of 10 best ETFs for 2018, but ends the first quarter near the bottom. However, XLE can still be among the best ETFs of the year.
To reiterate, the fund selection strategy outlined in my kickoff story for XLE’s outlook for 2018, I like to build a portfolio of funds around a few core holdings, such as an S&P 500 index fund like the SPDR S&P 500 ETF Trust (NYSEARCA:SPY), that would receive the largest allocations and then add satellite holdings with smaller allocations.
Among satellite holdings, I typically use three sector funds in diverse categories, each of which usually have a distinct purpose or reasoning for selection, such as growth/momentum, defensive and contrarian. My contrarian pick was XLE.
As I said at the beginning of the year, the sector picks should receive smaller allocations because they can be either the best performers or the worst for any given year. The idea is to have two out of three of your sector picks outperform the major market indices.
XLE’s prospects for the remainder of the year still look similar as they did at the beginning — still a contrarian bet. One glimmer of hope emerging for XLE, and a contrarian indicator as the first quarter ends, is that the price for oil is near a three-year high, while the energy sector lags. The last time there was a divergence between the price of crude and energy stock prices was in 2002, which was followed by energy sector out-performance in 2003.
Adding to recent potential promise for XLE, is renewed interest for big oil stocks from prominent analysts. For example, just a few days prior to writing this story, Goldman Sachs issued a bullish view on the energy sector. Goldman also has buy ratings on Chevron Corporation (NYSE:CVX) and ConocoPhillips (NYSE:COP), which are top holdings in XLE.
The underpinning support for energy stocks to move higher in 2018 comes from adjustments that big oil firms have had to make in recent years amid weak oil prices. Having to rein in capital spending has positioned these companies to be profitable at lower prices on oil. Therefore, energy stocks may be in position now to finally turn in the positive direction.
With the benefit of hindsight, the first quarter of 2018 was not a good time to hold XLE. However, the immediate future continues to brighten for the beaten-down energy sector and XLE still has the fuel to be one of the best ETFs of 2018.
As of this writing, Kent Thune did not personally hold a position in any of the aforementioned securities, although he holds XLE in some client accounts. Under no circumstances does this information represent a recommendation to buy or sell securities.