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VDE: Don't Worry About Short-Term Oil Price Weakness

Stuart Allsopp profile picture
Stuart Allsopp


  • The Vanguard Energy ETF has come under pressure in recent days amid a sharp drop in crude oil prices, but this should be little cause for concern.
  • The performance of oil majors relative to the overall stock market tends to be driven more by the price of oil long into the future than by front month prices.
  • Even with long-dated oil futures at current low levels, the energy sector’s share of the S&P 500 should be roughly double its current level if history is any guide.
  • This undervaluation is reflected in the VDE’s sizeable dividend yield, which should remain highly attractive unless we see a strong rally in the ETF.

Oil Or Gas Transportation With Blue Gas Or Pipe Line Valves On Soil And Sunrise Background
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The Vanguard Energy ETF (NYSEARCA:VDE) has come under pressure in recent days amid a sharp drop in crude oil prices, but this should be little cause for concern. The performance of oil majors relative to the overall

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/we have a beneficial long position in the shares of VDE either through stock ownership, options, or other derivatives. 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 (7)

Stu, I've kept this article in my back pocket for the past couple of months because my gut instincts told me you were on to something. Well give credit where credit is due, you call it. It's still work in progress but it looks like energy will see significant upside given the demand and price increases that we're starting to see. Thanks!
Lake OZ boater profile picture
Excellent article, thanks! Also...

Of the S & P 500 sectors, energy has the lowest Shiller P/E.

Sector---- Number of Stocks-------Shiller P/E-----Regular P/E
Financial Services--69--------------- 21.90----------15.00
Consumer Def-------35---------------- 27.70----------26.70
Basic Materials------21-----------------37.90-----------30.80
Comm Services------26------------------53.70---------35.90
Real Estate-----------29--------------------56.90--------62.00
Consumer Cyclical--66-------------------58.90---------71.60
S&P 500---------------500------------------38.6-----------34.5

Source: www.gurufocus.com/...
Stuart Allsopp profile picture
@LakeOZ boater Cheers and thanks for the info.
AspiretoRetire profile picture
An r-squared over .90 for anything is astounding, and in this case is as good a basis for predicting price movements as you’ll find in the market for any equity. That got my attention.

For clarification, r is the correlation and r-squared is the variance accounted for by the correlation. If the correlation is .9, the variance accounted for is .81 (r X r). That is also extremely high. Can you clarify? You identified .9 as the correlation (that is, r) and the r-squared; it is one or the other. From the chart, it looks like the r.
Stuart Allsopp profile picture
@AspiretoRetire Hi there. Thanks for pointing this out. It is the r squared. Also, oil prices are in log form.
AspiretoRetire profile picture
@Stuart Allsopp Wow. That’s like are relationship you see in physics, not finance.
Stuart Allsopp profile picture
@AspiretoRetire worth a long position on oil stocks but there’s always the risk that non oil stocks fall by half to maintain the correlation. Oil oil prices do. Still, certainly worth being overweight.
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