Extended production cuts by major crude exporters and high global oil demand will likely push oil and gas prices higher in the upcoming months, providing solid tailwinds for the energy industry.
Given the industry’s bright prospects, it could be wise to invest in energy ETFs Energy Select Sector SPDR ETF (XLE) and iShares U.S. Energy ETF (IYE) for portfolio diversification and potential gains. These ETFs provide exposure to a wide range of major energy companies positioned for significant growth.
Saudi Arabia, the world’s biggest crude exporter, recently extended its 1 million barrel per day (mb/d) voluntary supply cut until the end of 2023. Further, fellow heavyweight oil producer Russia pledged to slash oil exports by 300,000 barrels per day until the year-end.
Saudi and Russian production cuts will likely keep feeding into higher oil prices this year and beyond. Last month, the U.S. West Texas Intermediate futures touched $95.03 a barrel, marking the highest level since August last year, with increased production cuts and declining commercial crude inventories in the U.S. fueling oil prices. Also, Brent hit the highest price since November 2022.
Further, a survey of 42 economists and analysts forecast Brent crude to average $84.09 per barrel this year, an increase from August’s consensus estimate of $82.45. Oil prices are expected to stay well above $80 a barrel heading into next year, the Reuters poll showed.
“Saudi Arabia and Russia will dictate oil prices over the next three months,” said Bill Weatherburn, commodities economist at Capital Economics. “Supply cuts will probably be extended into 2024 as neither country wants prices to fall while they are grappling with higher government expenditures.”
In addition, as per U.S. Energy Information Administration (EIA) forecast, the Brent price could average $86 per barrel in the second half of 2023 and reach $88 a barrel in November and December this year. The Brent price in its forecast averages $86 a barrel for 2024.
According to the International Energy Agency (IEA), global oil markets will remain in deficit through the end of the year. In its latest monthly oil report, IEA stated that global oil demand continues to be on track to grow by 2.2 mb/d year-over-year to 101.8 mb/d in 2023, driven by resurgent Chinese consumption, jet fuel, and petrochemical feedstocks.
Further, IEA expects oil demand to rise by 1 mb/d in 2024.
In light of these favorable trends, let’s look at the fundamentals of the two best Energy Equities ETFs, beginning with number 2.
Stock #2: iShares U.S. Energy ETF (IYE)
IYE seeks to track the investment results of a market-cap-weighted index composed of large-cap U.S. companies in the energy industry. The fund holds a concentrated portfolio of companies that facilitate the production and distribution of oil and gas.
IYE tracks the performance of the Russell 1000 Energy RIC 22.5/45 Capped Index. With $1.36 billion in assets under management (AUM), its top holdings include Exxon Mobil Corporation (XOM) with a 23.26% weighting, followed by Chevron Corporation (CVX) at 15.17%, and ConocoPhillips (COP) and Schlumberger N.V. (SLB), at 7.48% and 4.38%, respectively.
The fund currently has 42 holdings in total, with its top 10 assets comprising 69.26% of its AUM.
Over the past month, IYE’s fund outflows came in at $12 million. In addition, its 0.40% expense ratio compares to the 0.44% category average. The ETF’s NAV was $46.39 as of October 3, 2023.
IYE pays an annual dividend of $1.38, translating to a 2.96% yield at the prevailing price level. Its dividend payouts have grown at a 9.9% CAGR over the past three years and a 7.6% CAGR over the past five years. The fund’s four-year average yield is 5.03%.
IYE has gained 7.9% over the past three months and 12% over the past year to close the last trading session at $46.39. It has a beta of 1.37.
IYE’s POWR Ratings reflect this promising outlook. The fund’s overall A rating equates to a Strong Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
IYE has a grade A for Trade, Peer, and Buy & Hold. Of the 46 ETFs in the A-rated Energy Equities ETFs group, it is ranked #5.
To access all IYE’s POWR Ratings, click here.
Stock #1: Energy Select Sector SPDR ETF (XLE)
XLE offers concentrated exposure to major U.S. energy businesses, including companies that develop and produce crude oil and natural gas and provide drilling and other energy-related services. The fund pulls its stocks from the S&P 500 rather than the total market, so its portfolio primarily favors large caps.
XLE tracks the S&P Energy Select Sector Index. It has an AUM of $39.04 billion. Its top holdings are Exxon Mobil Corporation (XOM), which has a 23.47% weighting in the fund, followed by Chevron Corporation (CVX) at 18.62%, and EOG Resources, Inc. (EOG) at 4.59%. The fund has a total of 25 holdings, with its top 10 assets comprising 73.93% of its AUM.
The fund has an expense ratio of 0.10%, lower than the category average of 0.44%. Its fund inflows were $529.45 million over the past month and $1.67 billion over the past three months.
XLE pays an annual dividend of $3.03, which translates to a 3.43% yield at the current price level. The fund’s dividend payouts have grown at an 11.3% CAGR over the past three years and a 9.2% CAGR over the past five years. It has paid dividends for 23 consecutive years.
XLE has gained 2.3% over the past six months and 16.4% over the past year to close the last trading session at $88.53. It has a beta of 1.36. The fund’s NAV was $88.55 as of October 3, 2023.
XLE’s strong fundamentals are reflected in its POWR Ratings. The fund has an overall rating of A, which translates to a Strong Buy in our proprietary rating system.
The fund has an A grade for Trade, Buy & Hold, and Peer. XLE tops the list of 46 funds in the same group. Click here to see all the XLE ratings.
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XLE shares fell $0.98 (-1.11%) in premarket trading Wednesday. Year-to-date, XLE has gained 2.78%, versus a 11.74% rise in the benchmark S&P 500 index during the same period.
About the Author: Mangeet Kaur Bouns
Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.
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