The difficult times of 2020 are far behind for the U.S. energy sector which struggled to keep pace with the broader market indexes last year and has soared from the last quarter of 2020. At the end of 2020, Wall Street investors might have expected the technology sector to be the top-performing sector in 2021 after gaining trillions of dollars in market value last year. But for now, 2021 has been the year for energy companies, on the back of rising crude oil prices, natural gas and coal prices which have all translated into a positive outlook for the U.S. energy giants. The technology sector is up around 18% this year while energy is up over 50% in 2021 so far. (Graph below)
Exhibit 1: Returns of Energy ETF (XLE) vs. Technology ETF (XLK) 2021
Source: SPDR ETFs, Data as of October 1, 2021 Note* Energy Sector is XLE ETF, Tech is XLK ETF
Energy ETF XLE gains over 60% YTD at the end of October 2021
The U.S. equity markets have posted an impressive gain this year via the SPDR S&P 500 (SPY) ETF which has gained over 23% so far. Among the Select Sector SPDRs which divide the S&P 500 into 11 sector index funds, the energy sector was by far the best-performing in 2021. The strength of the energy sector represented by the XLE ETF is up an astonishing 60% plus at the end of October 2021 (graph below). The Energy Select Sector SPDR ETF (XLE) tracks an index of energy companies in the S&P 500 index and represents the stocks of large energy companies from various sub-segments like integrated, oil production, consumable fuels, energy equipment & services which forms a good benchmark for conservative energy investors. Some of the biggest holdings in XLE Energy ETF include ExxonMobil (XOM), Chevron (CVX), ConocoPhillips (COP), EOG Resources (EOG) and Schlumberger (SLB) and the fund charges about 12bps in fees. The rise in the Energy stocks and ETF has been lifted by a combination of surging oil and gas prices which in turn is driving bullish earnings expectations amid mounting evidence that higher inflation is likely to persist for longer than expected.
Exhibit 2: U.S. Sectoral ETF performance as of the end of October 2021
Source: CapitalSpectator.com, Data as of the end of October 2021
The near-term outlook remains positive for the energy sector
Shares of the XLE fund are up approximately 120% from their 52-week low of $26.98 /share. (Graph below). Oil prices have been on the rise the past few weeks, thanks to supply disruptions and rising demand globally. Brent crude prices touched $85 /barrel recently for the first time since 2014 which is up 125% from one year ago. The outlook remains positive for the Energy sector on the back of rising crude oil and natural gas prices and several traders are again betting that crude oil prices are likely to touch the $100 a barrel mark by the end of the year which is positive for the energy stocks. Investors can expose to these rising crude oil prices by investing in the XLE fund (Energy ETF) which tracks the energy stocks.
Exhibit 3: XLE Energy Sector ETF Returns over the year
Source: Barcharts.com, Data as of the end of October 2021