Energy ETFs As Value Plays

Markets Benzinga

During the worst days of oil's most recent bull market, a cacophonous debate was heard. One side argued that energy equities were legitimate value plays while those bearish on the sector posited that the only reason price-to-earnings ratios in the energy patch were declining was because earnings estimates were doing the same.

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That debate could last as long as participants want it to, but there is no debating that the Energy Select Sector SPDR (ETF) (XLE), the largest equity-based energy exchange fund by assets, is higher by 16.4 percent year-to-date. Among the sector SPDR ETFs, only the Utilities SPDR (ETF) (XLU) is beating XLE.

The Value Factor

A glance at nearly any run-of-the-mill ETF dedicated to the value factor will turn up large sector exposure to two groups: energy and financial services. Not surprisingly, there is some debate surrounding the legitimacy of value among financials, but there is something to be said for value among energy names.

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Currently, only two sectors are trading at or below their 10-year price-to-book average: financials and energy. With financial companies facing certain challenges even as their balance sheets have improved since the Global Financial Crisis, investors may want to consider energy as a potential value play. In a positive sign for the sector, oil rig counts increased in June for the first time in 10 months, said State Street Vice President David Mazza in a recent note.

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Eyes On Oil

Oil is usually one of the third quarter's best-performing commodities, but XLE historically struggles in July. However, on a month-to-date basis XLE is higher by 1 percent.

Based on 10-year average price-to-book ratios, energy and financials are well below their averages, while consumer staples and industrial names are trading above their long-term averages, according to State Street data.

Investors will get some insight into the near-term outlook for the energy sector as soon as this week when oil services giants Schlumberger Limited. (SLB) and Halliburton Company (HAL) report earnings. Schlumberger and Halliburton, the two largest oilfield services companies, are both top 10 holdings in XLE, combining for nearly 12 percent of the ETF's weight.

XLE has attracted $893.3 million in new assets this year, good for one of the best totals among all sector ETFs.

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