Discovering Value in the Top 3 Energy ETFs 1.1

How would you like to own a fund that has outperformed the S&P 500 by over 3% compounded annual growth rate (CAGR) over the last 18 years? Wouldn’t it be even better if you could purchase such a fund at a 28% discount from it’s all-time-high (ATH). Can such a fund be found in today’s raging bull market? The answer is a definite yes. The fund I’m talking about is The Energy Select Sector SPDR ETF XLE. (see also PXI & VDE

As you may know, energy is considered the life blood of our modern industrialized world. So, no matter what the price of crude oil is today, as long as capitalism persists, there will be companies exploring for and producing oil and oil related products. These companies must change and adapt to the current price structure of oil and gas or they will go bankrupt. I’m betting on the former rather than the latter. I work in this industry and I have personally witnessed extreme cost cutting measures and efficiencies being implemented since the bear market in oil began in 2014. Many mergers and acquisitions (M&A) have already taken place and more will occur in the future. With each one of these cost cuts, efficiency implementations and M&A activity, these companies are getting closer to once again being profitable ventures, even with oil hovering around $50/barrel.

Don’t get me wrong now. I know that there are paramount risks to investing in this sector of the market. But, aren’t all your investments subject to risk, whether seen or unseen. Think about it. Who hasn’t wished they had taken every dollar they had ever made and put it to work in the U.S. Stock market in March 2009? Do you have any inkling of how risky that may have felt at the time? The entire U.S. Stock Market had just lost 50% of its value, and nobody knew it was the bottom, and the news wasn’t getting any better, yet. Behold, if you did wish that you had invested then, but didn’t, here is yet another golden opportunity. Oil companies are on sale, right now, at nearly a 30% discount.

If you haven’t been frightened out of investing in the Energy Industry, you may want to consider putting some of your portfolio to work in what I consider the Top 3 ETF’s available in this Sector. They are the PowerShares DWA Energy Momentum Portfolio ETF (PXI), the aforementioned Energy Select Sector SPDR ETF (XLE), and the Vanguard Energy ETF (VDE). Each has an advantage/disadvantage to the others and it will depend on what kind of account you’ll hold the funds in and your risk tolerance to decide which is more suitable to you.

I begin with the Energy Select Sector SPDR ETF (XLE) simply because it is the eldest. It became available in December 1998. This fund outperformed VDE and underperformed  PXI during the shorter time-frame of November 2006 through January 2017. I will show that chart when I describe PXI. I prefer XLE in my 401k simply because it pays a good dividend of 2.36% which in-turn pays my so-called “management” fee that is being assessed quarterly, and XLE outperforms VDE.

In the chart below, pay particular attention to the CAGR (+8.4%) and the correlation to the U.S. Stock Market (0.62)

Now, onto the Vanguard Energy ETF (VDE). While VDE does underperform both XLE and PXI, it is worth considering for use in a taxable account. It pays a little lower dividend than XLE and the expense ratio is a tad bit smaller. Also, you can trade VDE commission-free if you have a Vanguard brokerage account. VDE became available in September 2004.

As you can see in this chart, VDE & XLE are almost in lockstep with each other.

Okay, now onto the wild child. If you are risk-averse, or you don’t like volatility, then don’t buy PXI. Seriously kid, if you’re not “This Tall”, you can’t ride this ride. But, but, it does outperform both XLE and VDE. While it does outperform, it does it through much greater risk. This thing has a turn-over ratio of 119%. If you don’t know what that is, trust me, its high for an ETF. PXI reconstitutes and rebalances every 3 months. You simply do not want this thing in a taxable account. If you’re thinking about owning this, put it in your IRA. With the recent downtrend in oil stocks, we’ve begun a position in PXI. Yes, I like volatility.

With no further ado, here is the chart with all 3 Energy ETF’s head-to-head. PXI’s inception date was October 2006.

By now, you may be wondering why I selected these 3 ETF’s over the other 100+ Energy ETF’s. Good question. First, I eliminated all the leveraged and inverse funds. Then I eliminated any ETF newer than October 2007 (personal preference). Then I compared the all the remaining ETF’s head-to-head and these 3 (XLE, VDE & PXI) came out on top. That’s my methodology and I know there may be a better Energy ETF out there, but some of them just don’t have a long enough track record for me.

Thank you https://www.portfoliovisualizer.com/ for the back-testing tools.

Thank you http://etfdb.com/ for the wonderful ETF research tools.

Thank you https://www.scottrade.com/ for the ETF screener tool.

 

And thank you readers for taking the time to look at this blog post.

Respectfully yours, The Deep Value ETF Accumulator, aka Micah McDonald

Disclaimer: I’m a metrologist, not a financial adviser. Do your own due diligence before investing your hard-earned money. Thank you.