With the U.S. economy shifting out from its initial recovery stage and into normal growth rhythms, cyclical sector energy stocks and exchange traded funds could gain momentum next year.
"With the economy showing signs of positive momentum and the potential for an upside surprise, we are favoring cyclical sectors," Andrew Hill, co-founder of Andrew Hill Investment Advisors, said in an Investor's Business Daily article. "The energy sector offers potential, as commodity prices tend to rise in the middle to later stages of an economic cycle. This often leads to outperformance of the energy sector relative to the S&P 500."
Specifically, Hill points to the SPDR S&P Oil and Gas Equipment Services (NYSEARCA:XES) because it is less sensitive to oil and natural gas price fluctuations.
Unlike other large oil and gas services ETFs, XES equally weights its 49 holdings, which each make up a little over 2% of the fund. Consequently, small-cap stocks have a larger impact on the fund's performance, whereas other market capitalization-weighted ETFs would have a large exposure to prominent names like Schlumberger (NYSE: SLB).
While the equal-weight methodology helps avoid over-concentration in any single stock, the heavier tilt toward small-caps could result in greater volatility.
Looking at XES' market capitalization break down, mega-caps make up 2.4% of the fund, large-cap is 14.2%, mid-cap is 38.0%, small-cap is 32.1% and micro-cap is 13.2%.
In comparison, the Market Vectors Oil Services (NYSEARCA:OIH) and the iShares U.S. Oil Equipment & Services ETF (NYSEARCA:IEZ) take a greater emphasis on large-cap names. IEZ has 21.2% in giant-caps and 34.5% in large-caps, while OIH has 20.6% in mega-caps and 47.0% in large-caps. SLB is also the largest holding in both of these ETFs at 21.2% for IEZ and 20.6% for OIH.
SPDR S&P Oil and Gas Equipment Services
Max Chen contributed to this article.