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For much of 2023, tech stocks dominated the headlines and the market. However, as the summer winds down, it seems that a rotation into energy is underway. The previously unassailable Nvidia (
NASDAQ:NVDA
) is down 15% from its 52-week high, while Tesla (
NASDAQ:TSLA
) is down more than 23% from its high. Meanwhile, oil prices have quietly rallied this summer, and
oil stocks are grinding higher. For example, the
Energy Select Sector SPDR Fund (
NYSEARCA:XLE)
is up nearly 10% over just the past month.
If such a shift is indeed underway, XLE is a great way for investors to gain exposure to this move. Valuations in the sector are attractive, and many oil stocks feature significant dividend payers, making this an appealing part of the market to park money in.
What is XLE ETF's Strategy?
XLE is one of State Street’s (
NYSE:STT
) popular ‘SPDR’ ETFs, which give investors exposure to specific sectors of the S&P 500 (
SPX
). XLE invests in the energy sector of the S&P 500, and it has been around since 1998. This popular fund has accumulated $37.5 billion in assets under management (AUM), making it by far the market's largest energy-focused ETF.
What Does XLE’s Portfolio Look Like?
XLE’s holdings give investors undiluted exposure to
energy stocks. However, one thing that investors should be aware of is that this is not a particularly diversified ETF. XLE holds only 23 stocks, and the fact that its top 10 holdings make up nearly 75% of the fund makes it even less diversified. Below, you’ll find an overview of
XLE’s top 10 holdings from TipRanks’ holdings tool.
Furthermore, the fund’s top two holdings, ExxonMobil (
NYSE:XOM
) and Chevron (
NYSE:CVX
), have massive weightings of 21.4% and 18.4%, respectively, giving XLE quite a bit of exposure to just a handful of stocks. These are the largest energy stocks in the S&P 500, so the weightings make sense, but investors should simply be aware of this high degree of concentration.
That being said, XLE is essentially a directional bet on the energy sector, and most of these stocks trade in a similar fashion, so this lack of diversification may not end up making a meaningful difference.
Additionally, while XLE may not own many stocks, the ones it does own look pretty compelling, according to TipRanks’ Smart Score System. The
Smart Score is a proprietary quantitative stock scoring system created by TipRanks. It gives stocks a score from 1 to 10 based on eight market key factors. A score of 8 or above is equivalent to an Outperform rating. The score is data-driven and does not involve any human intervention.
Six of the eight market factors which are incorporated into the Smart Score calculation are unique to TipRanks; only the technicals and fundamentals are not. As you can see, a very impressive nine of XLE’s top 10 holdings boast Outperform-equivalent Smart Scores of 8 or better, led by ConocoPhillips (
NYSE:COP
), Pioneer Natural Resources (
NYSE:PXD
), and Occidental Petroleum (
NYSE:OXY
), which feature 'Perfect 10' Smart Scores.
Keep in mind that XLE also gives investors exposure to different aspects of the oil and gas sector. Within this industry, there are major differences between upstream companies that engage in the exploration and production of oil and gas, like Pioneer Natural Resources, and companies involved in downstream activities, such as refining, like Philips 66 (
NYSE:PSX
).
Larger, integrated companies like ExxonMobil and Chevron are involved in both types of activities. Holdings like ExxonMobil and Chevron feature extensive worldwide operations, while the likes of Pioneer and Devon Energy operate only within the United States.
In addition to these types of companies that deal directly with the production or refining of oil itself, XLE also has stakes in companies like Schlumberger (
NYSE:SLB
), Haliburton (
NYSE:HAL
), and Baker Hughes (
NASDAQ:BKR
) that provide oil field services, technology, and equipment to the aforementioned energy companies.
XLE itself features a strong Outperform-equivalent ETF Smart Score of 8.
Is XLE Stock a Buy, According to Analysts?
Turning to Wall Street, XLE has a Moderate Buy consensus rating, as 69.71% of analyst ratings are Buys, 27.04% are Holds, and 3.26% are Sells. At $99.72, the
average XLE stock price target implies 11.4% upside potential.
A Reliable Dividend ETF
XLE’s dividend yield is an attractive 3.6%. In addition to this attractive yield, XLE also has a long history as a reliable dividend ETF. XLE has paid a dividend for 23 straight years and has grown its payout for two years in a row. It's hard to find fault with that type of solid track record.
Reasonable Expense Ratio
Like many of the other SPDR ETFs, XLE has a very reasonable expense ratio of just 0.10%. This means that an individual investing $10,000 into XLE would pay just $10 in fees during the first year. Over the course of a decade, this investor would pay just $128 in fees, making this a sensible option for investors looking to invest in the energy sector.
Roller Coaster Performance
As of the end of July, XLE had a phenomenal annualized three-year total return of 40.7%, dramatically outperforming the broader market and even high-flying tech stocks. However, looking further out, XLE's five-year annualized total return is a still decent but far less scintillating 7.8%, while its 10-year annualized total return is a less impressive 4.5%.
Oil prices are volatile, so XLE has given investors plenty of ups and downs over the years. While it may not necessarily be the type of ETF that an investor can buy and hold forever, its incredible three-year return shows that it can be a very profitable ETF to own when oil prices have momentum (as they have had over the past few years, rebounding off of the low oil prices from the height of the COVID pandemic).
Investor Takeaway
Momentum seems to be returning to the energy sector as some money rotates out of the year’s biggest winners and into other sectors of the market like energy. XLE offers investors an effective way to gain exposure to the sector, with an attractive and reliable dividend, a modest expense ratio, and a strong portfolio of energy stocks with great Smart Scores.
Disclosure