Tuesday, May 28, 2013

Energy prices are in a multiyear downtrend yet 4 energy ETFs are among today’s top 10, keeping it as Quant’s favorite sector.  The front page of today’s Wall Street Journal provides a hint why with its story about US energy production causing rifts in the OPEC cartel.   The Vanguard Energy Sector Fund (VDE) and the SPDR Energy Select Sector Fund (XLE) in 7th and 8th place have similar constituents dominated by the integrated oil and gas producers and more than a third of AUM held in the oil and gas exploration and production sector that makes up the 1st place SPDR S&P Oil & Gas Exploration & Production Fund (XOP) and 6th place iShares Dow Jones U.S. Oil & Gas Exploration & Production Index Fund (IEO).  All are benefiting from the renaissance in US energy production.

The story says US fracking is a profitable way to extract oil as long as prices remain above $70 per barrel which is far below current prices.  All 4 funds have solid charts this year and technical scores around 70 but wider spreads on their sentiment scores.  The SPDR products have higher put/call and short interest scores while the two E&P funds have higher volatility scores which leads to XOP’s 1st place rank.  Fundamentally the spreads are closer where VDE gets the highest score at 65.3 which is not too far above XLE’s low at 58.2.  The most noticeable differentiator is the weightings of each funds’ constituents.  The broader XLE and VDE see the same top 5 holdings accounting for almost half of AUM.  On the E&P side, we also see similar constituents but IEO’s top 5 account for about 40% of AUM while XOP’s equally weighted strategy sees its top 5 holdings accounting for less than 9%.

Maybe it’s the Memorial Day blizzard in the northeast or the race fans wearing jackets at this year’s Indy 500.  We often see energy stocks do well on cold winter days and will see how they do on cold summer days.  Whatever the reason, energy funds have done well this year despite the downtrend in their commodity prices.  With all four funds getting 8 Green Reward Diamonds, the ETFGsm models say that solid performance is going to continue.  If risk is on your mind you might want to stick with XLE and its 3.71 Red Diamond Risk Rating, low among the group that sees higher than average risk generally.  We are pleased to see the sheiks and tyrants of OPEC cope with a diminished role over our economy and we are also pleased to congratulate Tony Kanaan on winning the Indy 500.

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