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XLE: 4 Reasons To Own Energy Stocks

Stuart Allsopp profile picture
Stuart Allsopp


  • We have lightened up on our aggressively overweight position on XLE in recent months after seeing an 80% rally from its October lows but we remain upbeat on the sector.
  • The tendency for oil and major oil producers to act as an inflation hedge is a major benefit of the sector for those investors concerned with rising price pressures.
  • XLE's underlying MSCI U.S. Energy sector continues to trade at a deep discount to its fair value based on the historical relationship with oil prices and U.S. equities.
  • XLE has a negligible expense ratio and also offers some safety relative to other oil ETFs due to the high weighting of revenues coming from chemical and refining operations.

Oil Prices Moving Up
Photo by sefa ozel/iStock via Getty Images

We have lightened up on our aggressively overweight position on Energy Select Sector SPDR ETF (NYSEARCA:XLE) in recent months after seeing an 80% rally from its October lows when we noted that

This article was written by

Stuart Allsopp profile picture
I am a full-time investor and owner of Icon Economics - a macro research company focussed on providing contrarian investment ideas across FX, Equities, and Fixed Income based on Austrian economic theory. Formerly Head of Financial Markets at Fitch Solutions, I have 15 years of experience investing and analysing Asian and Global markets.

Analyst’s Disclosure: I am/we are long XLE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (62)

Algorithmic profile picture
@Stuart Allsopp Fun to go back and read the comments. Pick 1 generalization you can glean from the Comments section:

1. how inaccurate most Commentators are
2. how impatient most Commentators are
3. how uninformed most Commentators are
4. how wrong most Commentators are
5. All of the above
Sorry. I forgot that most of SA are opinion pieces.

Needs to break resistance and hold above $53.79.
Has XLE ever been green?
Stuart Allsopp profile picture
@TheRagingBulll are you in a different xle to me? Cos mine is flying
Red again. XLE is suicide!!
Oil UP, energy stocks red. Killin me :(
Red again who would've guessed sigh
Jim Wallingford profile picture
Oil stocks (CVE, CPG, SU, IMO) down today on anemic volume. I'd be dipping a toe or two here with OPEC+ supply picture clearer, the US vaccination going well and price stable around $60 for WTI.
@Jim Wallingford Agreed 1,000%. XLE & XOP are off 35-50% from 2019 average prices even though the oil price is higher right now than it was for most of 2019.

There is going to be a big pop coming up during earnings season. The price of oil doesn't even need to go up for these stocks to be great values.

Also...nobody wants to talk about that gigantic PPI number that came in this morning. A 1% bump in producer prices translates to a 12% annualized inflation rate. That is gigantic and these pressures are certainly not transitory.
Jim Wallingford profile picture
@Tntowldct They may not be transitory but central bankers and government officials are saying there will be a short period of rising prices followed by a return to low to moderate inflation.
Real007 profile picture
Was long XLE (nice ride) , now out -- EIA (among others) sees Brent falling from $65 to $60 this year, WTI spreads are in free fall.

Demand just isn't there (globally).
@Real007 I like all my O&G investments at Brent $60.
XRTrader profile picture
@Real007 XLE will appreciate prior to and into the boom for oil and gas demand. As USA and China start fully opening and traveling in May/June, and Europe follows in mid/late Summer we will see oil demand skyrocket. XLE will have a very strong May and June.
@Stuart Allsopp Great article.

Even without the silly money printing, we are at the very beginning of a commodity supercycle and it would not shock me to see $200 oil in 2 years. There are billions of non-EV cars on the road (and rapidly growing) globally that won't go away just because ESG types want them to (the US/Europe isn't the demand growth driver...it's India/Latin America/China). Energy policies in the developed world are going to curtail oil production growth severely, leaving OPEC in charge just like what happened in the 2004-2012 time period.

Pretty much everything is a gigantic asset bubble right now (EVs, for sale housing, tech stocks, cryptocurrencies) other than commodities. The fortune that will be made in the next decade is going to be in hard assets.
Stuart Allsopp profile picture
@Tntowldct Many thanks. Good points re policies curtailing production in the West. Its really gonna be a gift for EMs and OPEC.
@Stuart Allsopp Also, the next leg up on the XLE/XOP is going to be during earning season in a few weeks. The oil price in Q1 2021 was 35% higher than Q4 2020. None of the analysts have modeled this appropriately.
Real007 profile picture
@Tntowldct World liquids production is up, ditto US oil production -- heading back to 11 mmb/d, BUT demand is a NO SHOW.

Liquids are dead money for the remainder of the year.
"XLE's underlying MSCI U.S. Energy sector continues to trade at a deep discount to its fair value based on the historical relationship with oil prices and U.S. equities".....The problem with this statement is as non-fossil based energy grows, oil-related stocks will continue to suffer weakening/declining valuations on a secular basis. Declining secular valuations will most likely result in this group underperforming the S&P 500 and growth stocks over a long term horizon. I would agree that there may be a decent trading opportunity in these stocks in the next year or two.
Agreed. I pretty much detest energy as a sector, but I am long some names via options with a 12-18 months time horizon. Last year’s valuations were just too good to ignore, but long term the sector will underperform, most likely severely.
perma_chicken profile picture
@TheHornet Do you have any non-US energy exposure, or do you see relative upside in them? For e.g., Canadian and European big oil are severely underperforming American companies. I too have been long call options for months on a variety of American energy companies (refineries, exploration, etc.) and it has worked out very well. But recently I moved some money to non-US companies that are trading way too low (like Suncor Energy).
"Do you have any non-US energy exposure, or do you see relative upside in them?"

I do. LUKOY (which might be the only energy stock I'd say I might keep long term) and SU (long dated options).
XLE a perfect hedge against making money as seen today.
@Stuart Allsopp unfortunately it is true every day.
Good data and commentary.
i agree with your opinions on oil stocks. also, you can get a similar exposure to the oil and gas industry via FENY, whose 0.08% expense ratio is less than XLE's.
Some good points made here. Thank you for the good reading.
Don't buy XLE. By giving money to big oil and gas, you are contributing to your own death, and ultimately the death of humanity, and if we stop we can save lives. Buy utilities like Brookfield if you want a replacement for energy. You'll make more money too.
@Alex va how does buying a publicly traded share mean iI would be giving money to companies? unless i'm buying a share offering, aren't I just taking the shares off someone else?
@blackag Of course. I make the same point regularly to my wife who takes exception to my investing in MO and PM
@Mayo Man i have no allegiance to any companies or sectors, just to my own wallet. if something is undervalued, i'll buy it, simple as that
The energy sector is strange. Look at the time right after the last time there was a situation in the Ukraine.


There was a concerted effort to punish Russia via pumping oil as fast as OPEC could to drive down the price of oil, and it was successful.

Now there is something brewing there again. This is interesting.
Cyclical sectors will continue to do well in 2021...just buy these and hold ...

Financials - IAT, IAI, IPAY
Industrials - ITA, IYT
Materials - XLB
Energy - ICX, IEZ
Consumer Discretionary - ITB, PEJ
The XLE excludes energy companies domiciled outside the US. Petroleum is an international commodity. XLE investors miss exposure to excellent companies like Royal Dutch Shell, Canadian Natural Resources, France's Total, and Norway's Equinor, to name a few.

Thank you for the article!, will this affect the oil price in the near future or long run? Thank you,
Disagree with this article? Submit your own. To report a factual error in this article, . Your feedback matters to us!

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