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Don’t Count Out Energy ETFs Quite Yet

The Energy Select Sector SPDR Fund (NYSEArca: XLE) and other energy exchange traded funds are enduring their fair share of pain this year, but investors shouldn’t be too hasty in writing obituaries for the downtrodden energy sector.

 

XLE seeks to provide investment results that correspond generally to the price and yield performance of publicly traded equity securities of companies in the Energy Select Sector Index, which includes securities of companies from the following industries: oil, gas, and consumable fuels; and energy equipment and services.

 

“It is hard to overstate how cruel 2020 has been to oil-and-gas equities. Beyond the short- to medium-term headwinds of coronavirus, longer-term questions continue to pop up,” according to Wells Fargo Securities. “It seems nearly every week (and sometimes multiple times per week) there is a new headline about a city, state/province, or country planning to mandate low or zero tailpipe emission vehicles within the next 10 to 20 years.”

 

Over the course of the pandemic, it wasn’t hard to find forecasts saying that oil demand would take years to return to 2019 levels. Some banks even said pre-pandemic demand may never be seen again. However, rosier assumptions are now in play.

 

Hope Remains for XLE

“Multiple high-profile companies have made promises to cut their net emissions as soon as 2030. ‘Net Zero’ by 2050 has become so common that it hardly rates a headline. [But] it is worth considering the amount of material and energy that will be required to build and sustain this new green world. Good luck hauling all of those windmills blades and mining, processing, and creating all of the metals and carbon fibers without the oil-and-gas sector,” according to Wells Fargo.

 

Some data points indicate sell-side analysts remain bullish on energy stocks, including some XLE components. Valuation may be one reason why. The recent sell-off may have opened up a potential buying opportunity for bargain hunters, especially in the oversold energy sector.

 

Additionally, there are ways fossil fuels producers can benefit from the move to going green.

 

“Taking electric vehicles from 2% of new cars sold to 20% or beyond is going to put a lot of strain and stress on that supply/manufacturing chain system,” notes Wells Fargo. “Expect more negative headlines about those costs (visible and hidden) in coming years. It may be a while before oil enjoys a ‘boom’ but its ‘demise has been greatly exaggerated,’ to borrow a phrase, in our view.”

 

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