Energy Select Sector SPDR ETF: 2014 Halftime Report And Seasonality

Jul. 2.14 | About: Energy Select (XLE)

Summary

The Energy ETF was the No. 2 performer ranked by returns among the 9 Select Sector SPDRs during the first half of this year.

Sector rotation qua sector rotation appears to have had either little or no role in the ETF’s share-price performance in 2014.

Its key driver seems to be the spike in the price of crude oil caused by recent developments in geopolitics.

The Energy Select Sector SPDR ETF (NYSEARCA:XLE) in the first half of this year ranked No. 2 by returns among the Select Sector SPDRs that split the S&P 500 into nine segments. On an adjusted share-price basis, XLE ballooned to $100.10 from $87.67, a burgeoning of $12.43, or 14.18 percent.

XLE thus overperformed the SPDR S&P 500 ETF (NYSEARCA:SPY) by a lot and underperformed the Utilities Select Sector SPDR (NYSEARCA:XLU) by a little. During the first half, the former grew to $195.72 from $183.00, an increase of $12.72, or 6.95 percent, while the latter progressed to $44.26 from $37.34, a yield of $6.92, or 18.53 percent.

Almost all the differences in relative performance among the Select Sector SPDRs in the first half appear attributable to the sector rotation one would anticipate at this late point in the economic/market cycle. However, XLE seems to be stepping to the music of a different drummer, one associated with the Islamic State of Iraq and the Levant, or ISIL.

Figure 1: XLE No. 2 Among Select Sector SPDR ETFs This Year

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Source: This J.J.'s Risky Business chart is based on analyses of adjusted daily share-price data at Yahoo Finance.

Both the overperformance of the Utilities, Health Care (NYSEARCA:XLV), Materials (NYSEARCA:XLB) and Technology (NYSEARCA:XLK) SPDRs and the underperformance of the Consumer Staples (NYSEARCA:XLP), Financial (NYSEARCA:XLF), Industrial (NYSEARCA:XLI) and Consumer Discretionary (NYSEARCA:XLY) SPDRs appear broadly consistent with sector-rotation theory, as discussed by Alessandro Beber, Michael W. Brandt and Kenneth A. Kavajecz in their National Bureau of Economic Research working paper, What Does Equity Sector Orderflow Tell Us About the Economy?

However, the acceleration in XLE's performance from the first quarter to the second quarter seems to have had either little or nothing to do with sector rotation.

Figure 2: Crude Price Per Barrel And XLE Price Per Share

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Source: This J.J.'s Risky Business chart is based on the monthly adjusted price per share of XLE available at Yahoo Finance and the monthly unweighted average of the daily closing spot price per barrel of West Texas Intermediate crude oil at Cushing, Okla., (WTI-Cushing) calculated by the U.S. Energy Information Administration.

Note: The WTI-Cushing datum for June 2014 is an estimated number founded on EIA daily data for the first 16 trading days of the month. The actual number will be reported July 9.

Geopolitics has been among the biggest drivers of the price not only of crude oil but also of XLE in the 21st century, as indicated by their performances since the SPDR was launched in December 1998 (Figure 2). Both the long-term effect of the American government's choice to invade Iraq in March 2003 and the short-term impact of the Chinese government's decision to accumulate a wide assortment of commodities in advance of the Beijing 2008 Olympic Games in August are clearly discernible.

One consequence of the Iraq War is the ISIL, an actual movement with potential implications for crude production in a country that in 2012 ranked No. 5 in proved reserves of oil with 143.1 billion barrels and No. 8 in production of oil with 3.0 million barrels per day, according to the EIA.

If the Iraqi crude-oil flow were to be disrupted by the ISIL in a major way any time soon, then the prices of the commodity and XLE most likely would climb even faster in the second half than they did in the first half of this year. To put this possibility in its proper perspective, EIA data suggested the estimated monthly unweighted average of the daily closing spot price per barrel of West Texas Intermediate at Cushing, OK, increased to $105.56 in June from $94.62 in January, a rise of $10.94, or 11.56 percent.

Figure 3: XLE Monthly Change, 2014 Versus 1999-2013 Mean

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Source: This J.J.'s Risky Business chart is based on analyses of adjusted monthly share-price data at Yahoo Finance.

XLE behaved better in the first half of this year than it performed in the first halves of its initial 15 full years of existence based on the means calculated by employing data associated with that historical period (Figure 3). The same data set shows the average year's first half has been stronger than its second half, in terms of the ETF's share price. Because of the developments in the Middle East mentioned above, however, this seasonal tendency may not manifest itself this year.

Figure 4: XLE Monthly Change, 2014 Versus 1999-2013 Median

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Source: This J.J.'s Risky Business chart is based on analyses of adjusted monthly share-price data at Yahoo Finance.

XLE also behaved better in the first half of this year than it performed in the first halves of its initial 15 full years of existence based on the means calculated by using data associated with that historical period (Figure 4). The same data set also shows the average year's first half has been stronger than its second half, in terms of the ETF's share price. Again due to the developments in the Middle East mentioned above, this seasonal tendency may not manifest itself this year.

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