XLE: Being Popular Does Not Yield Returns in 2012

Published on Wednesday, 14 March 2012 20:50 Written by Todd Shriber

New York, March 14^th (TradersHuddle.com) – The Energy Select Sector SPDR (NYSE: XLE) is nothing if not cheap, large and well known. With a scant expense ratio of just 0.18% and $8.25 billion in assets under management, it’s easy to see why XLE is arguably the most popularity ETF tracking the energy sector on the market today. Popular is nice in high school, but it’s essentially meaningless in the financial markets because there is no empirical evidence to suggest popularity and positive returns share a noteworthy correlation.

In the case of XLE, popularity has meant a year-to-date performance of just over 4%. Not bad and its puts the ETF of its two largest holdings, Exxon Mobil (NYSE: XOM) and Chevron (NYSE: CVX). The two largest U.S. oil companies comprise about a third of XLE’s weight.

Outperforming its top two holdings is a feather in XLE’s cap, but in 2012, the ETF has also been outpaced by a slew of smaller rivals, and in some cases, XLE is being outperformed by other SPDRs funds. For example, the SPDR S&P Oil & Gas Exploration & Production ETF (NYSE: XOP), a fund that is far more volatile than XLE, has doubled XLE’s returns this year. The same goes for XOP’s primary rival, the iShares Dow Jones US Oil & Gas Exploration & Production Index (NYSE: IEO).

Maybe you don’t want to dabble in the futures market, but ETFs help alleviate that burden and along those lines, the United States Brent Oil Fund (NYSE: BNO) has pretty much embarrassed XLE this year, offering quadruple the returns of its equity-based counterpart.

Back to stocks for a moment. While XLE has performed better than some of its constituents this year, another top-10 holding, Schlumberger (NYSE: SLB) has had something to say in the matter. The world’s largest oilfield services provider has done a lot better than XLE. So has National Oilwell Varco (NYSE: NOV). Basically, oil services stocks have outperformed the XLE in 2012, as both the Market Vectors Oil Services ETF (NYSE: OIH) and the iShares Dow Jones US Oil Equipment Index Fund (NYSE: IEZ) have generated superior returns.

XLE also lags the ETFs that track several of the world’s largest oil producers. Taking on more risk has meant bigger rewards for those investors that passed on XLE in favor of the Market Vectors Russia ETF (NYSE: RSX) and the Global X FTSE Colombia 20 ETF (NYSE: GXG), just to name a pair.

If you want go digging really deep for more obscure fare, the IndexIQ Global Oil Small Cap Equity ETF (NYSE: IOIL) has out-dueled XLE, as well. Just goes to show being popular is overrated.