by 036Gooddaysir036
Introduction:
“The only thing certain about oil is uncertainty.” – Dr. Subroto, then Secretary-General of OPEC.
After the clean energy post there were some asking about oil/traditional energy. This post will probably be more controversial, but here are still many out there that believe oil/gas will continue to have a future.
So this post will focus only on the energy ETF: XLE. Also, XOP and USO will be briefly discussed at then end. Individual holdings will not be discussed, this will be left up to individual research. Let it be said upfront – Unless you have very high risk and volatility tolerance this market sector should be avoided!
For most normal investments it is always important to keep a long-term window on your mind, however in this case, with cleaner energy sources poised to slowly replace traditional energy, it would be wise to be mindful about the potential gradual decline of these ETFs/market sector. With this being said however, oil forecasters (just like market forecasters) have been so wrong so many times in the past 30 years. Whenever it is predicted that oil will do one thing, it does the opposite.
As the world transitions to cleaner resources many countries will continue to lean heavily on oil/natural gas to bridge over. Interestingly, Germany actually increased their consumption of traditional energy sources as they have gradually weaned off their nuclear power plants in their plans to transition to greener sources (What do you guys think about nuclear power as a clean resource?). This bridge period will keep these sources relevant for some years to come.
Additionally there are many other factors than will affect the prices in the future, such as: wars, internal OPEC conflicts, an increased number of drivers in developing nations, an increased need for cheaper energy in developing nations, the use of oil in many products and services still, a rise in air travel (especially after COVID), etc. There are many reasons that oil/coal/natural gas will/won’t remain relevant. (If anyone has any additional insight or an interesting note please let us know! I don’t want this to be too long here)
Alrighty so…
XLE: Energy Select Sector SPDR Fund
Let’s break down what XLE aims to do and it’s holdings. XLE tracks a market-cap-weighted index of the S&P500, because of this it is only composed of US companies. Its primary aim is to provide high liquid exposure to the US giants of the oil and gas industries. The holdings consist of many companies we are all familiar with, examples: Chevron, Exxon Mobil, Conoco, Phillips 66, Valero, and so on. Currently it has 27 holdings.
Top sectors:
- Oil & Gas Refining and Marketing – 59.10%
- Oil & Gas Exploration and Production – 20.55%
- Oil & Gas Transportation Services – 10.79%
- Oil Related Services and Equipment – 9.57%
Currently numbers for XLE:
- Current Price – $30.54
- 52-Week High – $62.44
- 52-week Low – $22.88
Like everything else, XLE dropped to lows in March, rallied to the mid-40s by mid-summer and has been falling since. However, at this point, the average volume is on a decline, this indicates that the number of sellers might be lower, this could lead to price stabilization around the ~$30 mark. Here is where investors with a high risk tolerance could consider buying in. The assumption (refer to the quote up top) here is that oil and gas demand will pick up next year. According to some estimates the world demand for oil next year will increase, however, a reverse side to this are predictions for second infection wave that slows the economic recovery. Again, if you do not like volatility then do not consider this position.
A note about the dividend yield: Yes, XLE does have a high dividend yield at 7%, however, the payout amounts have fluctuated greatly. This is a given considering the fact that oil went negative in April. Due to this ETF’s heavy concentration in one particular sector and the given volatility, it might be better to look elsewhere for a stable high dividend yield if that is your interest.
A Note about the Individual Companies:
The majority of this is being left to individual research. This post would be too long to talk about all the players. A noteworthy mention though is that many of these large oil and gas companies are not blind about the eventual decline of oil and gas (a time window for this decline is obv up to speculation), and many are trying to reinvent themselves or reposition themselves to enter into the green markets (or other markets) to maintain relevance. Just some thought juice.
A Note about XOP and USO:
XOP is often compared to XLE, please note the difference: XOP provides an equal-weight approach to oil/gas exploration & production. Due to this the fund has higher exposure to the number of small- and midcaps increasing it’s volatility. It is also very heavily weighted towards Exploration and Crude. This ETF is more affected by crude oil futures and has been hit partiularly hard due to its small and mid caps not being able to weather COVID and negative oil.
USO is an ETF that is designed to track the daily price movements of West Texas Intermediate. If you compare the 5 year price of oil to the 5 year price of USO you can see how USO drastically underperforms against its benchmark. Additionally, this ETF deals heavily in futures contracts, which normally isn’t an issue unless the price for whatever they bought crashes (Like oil did in April). So in the short term they are hemorrhaging money and then having to reinvest back in at higher prices. The main takeaway from this would be – If you want exposure to Oil/Crude Oil, XLE, XOP, or just energy stocks might be a better option.
Takeaway/Final Thoughts:
This post I am sure will be controversial. So again, this cannot be stressed enough, unless you have high risk tolerance or a positive outlook for Oil and Gas, avoid these funds/market sector. If anyone has any constructive arguments for or against oil/gas, please comment! It is always great to hear about everyone’s perspective, especially if they are well versed in the particular industry.
Additionally guys, I am just a dude that likes investing, researching, and sharing ETFs and Stocks, I do hold very small positions in XLE just because I believe there may be some positive swings in the future, but that is just my personal opinion. Point is – PLEASE DO YOUR RESEARCH, especially since I am not an advisor and this is certainly not holistic, there is a lot going on behind the scenes for oil and gas. Subsidies, taxes, regulations and all that weren’t even mentioned buy they absolutely have their implications. And, as always thankyou for reading. Have a good day everyone!
Disclaimer: This information is only for educational purposes. Do not make any investment decisions based on the information in this article. Do you own due diligence or consult your financial professional before making any investment decision.