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Energy ETFs Head to Head: XLE vs. IYE

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The energy sector has been attracting a lot of investor attention lately. Oil prices have been relatively stable lately, owing to the recent supply cut extension by OPEC.


What Lies Ahead for Crude?


OPEC recently extended its production cut till late 2018, in order to drive crude prices. Moreover, talks of OPEC working on an exit strategy for its supply cut have provided support to crude prices. Fading prospects of an abrupt end to the production cut deal when the excess inventories are cleared out led to a rally in crude prices.


Moreover, crude inventories in the United States fell 6.5 million barrels in the week ending Dec 15, compared with analyst expectations of a decrease of 3.8 million barrels.


However, there are increasing headwinds related to the future of crude oil. U.S. inventories have been extremely volatile and whether it will be able to stabilize the prices is still uncertain. Moreover, the U.K. North Sea pipeline is scheduled to restart in January. The North Sea pipeline carries around 450,000 barrels of crude per day to Britain and was closed after an inspection revealed a crack in an onshore section of the pipeline. This weighed on crude prices.


Let us now discuss two ETFs focused on providing exposure to the sector.


Energy Select Sector SPDR Fund (XLE - Free Report)


This fund seeks to provide exposure to energy stocks and tracks the Energy Select Sector Index. It has AUM of $17.4 billion and charges a low fee of 14 basis points a year. It has 32 holdings and bears significant concentration risk as more than 72% of the assets are allocated to the top 10 holdings.


From a sector look, the fund has exposure to Oil, Gas & Consumable Fuels and Energy Equipment & Services, at 85.4 and 14.6%, respectively (as of Sep 30, 2017). The fund’s top three holdings are Exxon Mobil Corp (XOM - Free Report) , Chevron Corp (CVX - Free Report) and Schlumberger Ltd (SLB - Free Report) , with 22.7%, 17.1% and 6.8% allocation, respectively (as of Dec 20, 2017).  The fund has lost 6.1% in a year and 4.7% year to date (as of Dec 21, 2017). XLE has a Zacks ETF Rank #3 (Hold) with a High risk outlook.


iShares U.S. Energy ETF (IYE - Free Report)


This fund seeks to provide exposure to energy stocks and tracks the Dow Jones U.S. Oil and Gas Index. It has AUM of $1.1 billion and charges a fee of 44 basis points a year. It has 67 holdings and bears concentration risk as more than 67% of the assets are allocated to the top 10 holdings.


From a sector look, the fund has high exposure to Integrated Oil & Gas, Oil & Gas Exploration & Production and Oil & Gas Equipment & Services, at 42.4%, 26.3% and 12.5%, respectively (as of Dec 20, 2017). The fund’s top three holdings are Exxon Mobil Corp, Chevron Corp and Schlumberger Ltd, with 23.4%, 15.3% and 6.0% allocation, respectively (as of Dec 20, 2017). The fund has lost 7.1% in a year and 5.2% year to date (as of Dec 21, 2017). IYE has a Zacks ETF Rank #3 with a High risk outlook.


Bottom Line


XLE is more popular than IYE, as is evident from its higher AUM. Moreover, XLE may be more appealing to investors owing to its cheaper expense ratio.  However, IYE has a more diversified exposure in terms of a number of holdings.


At the same time, both the funds have had relatively similar performance. IYE has lost 0.5% more than XLE so far this year, whereas in a year, it lagged XLE by 1%. Although the future for this space is still uncertain, prices seem to be gaining some stability on latest developments in the sector. Although U.S. inventories continue to bother the markets, investors are optimistic about OPEC’s plans to avoid a sudden exit from its production cut plan.


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