The Energy Select Sector SPDR Fund (XLE) aims to provide investment results that correspond generally to the price and yield performance of the Energy Select Sector Index. People investing in the fund will gain exposure to the US energy sector, which encompasses industries such as oil, natural gas, and energy equipment and services.
Launched in December 1998, XLE includes some of the largest and most influential energy companies in the world.
Energy is a vital component of the global economy, driving industries, transportation, and power generation. XLE provides investors with a portfolio of major energy companies, including ExxonMobil, Chevron, and ConocoPhillips, making it a popular choice for those looking to capitalise on trends in the energy market.
As of November, 2024, the Energy Select Sector SPDR Fund's assets under management are $37.92 billion. It currently holds 22 stocks.
Bull and Bear Case on the XLE
Given the varying factors that can impact the energy market, such as global demand, geopolitical tensions, and the energy transition, analysts hold varying views on the sector:
Bull Argument: The energy sector continues to benefit from global demand for oil and gas, particularly from emerging markets. In a recent research note, analysts noted that while Trump's foreign policies could increase the risk to oil markets, the large OPEC spare capacity is expected to limit the magnitude and duration of a supply-shock-induced price jump.
Furthermore, an article from CNBC highlights that OPEC's 2024 World Oil Outlook report forecasts robust energy demand growth of 24% globally between now and 2050, while it also sees “robust medium-term growth” in oil demand, hitting 112.3 million barrels per day in 2029, representing growth of 10.1 million barrels per day compared to 2023.
Bear Argument: The global shift toward renewable energy and decarbonisation has long been viewed as a long-term challenge to traditional energy markets and companies. Furthermore, other, more recent bearish factors that could potentially impact the price of oil are the potential for an OPEC+ price war and weak demand from China. A continued economic slowdown in the country could weigh on energy prices as a whole, impacting the Energy Select Sector SPDR Fund.
Our View: The Energy Select Sector SPDR Fund offers a concentrated and efficient way to gain exposure to the US energy sector, particularly for investors bullish on oil and gas prices or seeking dividend income from established companies. While the sector faces risks from the energy transition and price volatility, XLE remains a solid option for those looking to put their cash into energy stocks.
Energy Select Sector SPDR (XLE)
Since the initial COVID-19 plunge in 2020, the energy sector has experienced fluctuations driven by geopolitical events, shifts in energy demand, and the push to transition to renewable energy sources.
| Year | Performance |
|---|---|
| 2024 (YTD) | +16.20% |
| 2023 | -0.64% |
| 2022 | +64.17% |
| 2021 | +53.31% |
| 2020 | -32.51% |
XLE Top Holdings (end November, 2024)
| Company | Weight |
|---|---|
| Exxon Mobil | 21.49% |
| Chevron | 15.67% |
| ConocoPhillips | 7.96% |
| Williams Companies | 4.88% |
| ONEOK | 4.53% |
| EOG Resources | 4.43% |
| Schlumberger | 4.27% |
| Phillips 66 | 3.85% |
| Kinder Morgan | 3.74% |
| Marathon Petroleum | 3.58% |
Who Should Buy the Energy Select Sector SPDR Fund?
While the XLE may be an attractive option, investing in the fund won't be suited to everyone. Here's who may be more suited to investing in the Energy Select Sector SPDR Fund:
As we have explained, investors seeking exposure to the traditional energy sector will find XLE a great option, with exposure to some major US-listed names.
The fund is also suitable for income-focused investors, as many energy companies in XLE pay consistent dividends.
Meanwhile, those looking to hedge against inflation may also find the fund attractive as oil and gas prices typically rise during inflationary periods, helping the profits of energy stocks.
However, the fund may not be suitable for investors with a strong focus on environmental, social, and governance (ESG) criteria for obvious reasons. Along those same lines, investors concerned about the long-term impact of the global energy transition on fossil fuel demand should maybe look elsewhere.
Overall, with its focused exposure to leading US energy companies and strong performance during periods of rising commodity prices, XLE is a tempting choice for investors with a bullish outlook on the energy sector that do not want to trade commodities directly.
