|Instrument:Energy Select Sector SPDR|
Energy is literally what fuels change around the world. Movement, heating, and production require a force to transform a physical matter into another one. Fire, the oldest source of energy, was harnessed about 1.7 million years ago. It was followed by domesticated animals, wind, coal, steam over centuries.
The industrialisation of crude oil in the 19th century revolutionised human life and led to inventions to utilise natural gas, nuclear power, and solar energy. As one of the vital industries for modern humanity, the Energy sector sparks the fiercest conflicts between countries and attracts investors to trade the stocks of the Energy companies in the financial markets.
What is the Energy Sector XLE?
Energy Select Sector SPDR Fund (NYSEARCA: XLE), commonly known as the Energy Sector XLE, is a U.S. Energy sector index with a strong emphasis on the Oil industry. It measures the aggregated performance of 28 large-cap oil and gas companies listed in the S&P 500 index (SPX) with a total market capitalisation over $3.5 billion. XLE index is traded as an exchange-traded fund (ETF) in the NYSE Arca, and it tracks the larger S&P Energy Select Sector Index with full replication.
The History of Energy Sector XLE
Energy Sector XLE fund was introduced on December 16, 1998, by State Street Global Advisors, Inc., the investment management division of the world’s third largest asset holder, State Street Corporation. The XLE ETF started trading at $23.31 and remained in the $20-$35 range.
In mid-2004, it broke above $35 and continued to climb for the next 4 years until it peaked $91.42 in May 2008, just before the Great Recession. XLE lost more than two-thirds of its value and dropped back to $35 in less than 12 months. The recovery was volatile, but the uptrend was maintained until the index reached its all-time high at $101.52 in mid-2014.
The success was short lived; XLE fell immediately afterwards and stabilised between $55 and $80 until the end of 2019. At the beginning of 2020, XLE visited its nostalgic $35 region once again due to the market shock caused by Coronavirus pandemic.
Energy Sector XLE ETF Composition
Energy Select Sector SPDR Fund portfolio is comprised of 28 SPX companies from the oil, natural gas, consumable fuels, and energy-related equipment and services industries. The XLE index value is calculated by S&P Dow Jones Indices (S&P DJI). It is classified as a market-cap weighted index, and the influence of each constituent company is based on its market capitalisation.
The XLE commission of the S&P DJI meets on a quarterly basis to evaluate the performance of the constituents. Any changes in their market capitalisations are reflected in the index value by rebalancing the weight assigned to each company. XLE dividends are distributed on a quarterly basis.
Sectors in the Energy Sector XLE ETF
|Oil & Gas Sectors||Index Weight|
|Refining and Marketing||61.49%|
|Exploration and Production||20.36%|
|Related Services and Equipment||8.09%|
Top 10 Companies in the Energy Sector XLE ETF
|EOG Resources, Inc.||4.52%|
|Valero Energy Corporation||4.26%|
|Williams Companies, Inc.||3.84%|
|Kinder Morgan Inc Class P||3.72%|
|Marathon Petroleum Corporation||3.42%|
How to Trade Energy Sector XLE ETF?
Energy Sector XLE ETF is one of the most popular Energy sector ETF instruments. It has a higher trading volume than other Energy ETFs, offering high liquidity and low holding costs.
XLE is comprised of the U.S. Oil behemoths and favours large-cap firms, representing a specific section of the market. Although the portfolio is highly liquid, the XLE ETF share price is vulnerable to the fluctuations in Chevron and ExxonMobil stocks.
This restriction protects the portfolio value against various external risk factors such as the vulnerability of smaller companies and/or the direct influence of foreign entities. However, it also enhances the disadvantage caused by internal risk factors like proneness to the price volatility of high-weighed stocks.
Fundamental Analysis of Energy Sector XLE ETF
Energy Select Sector SPDR (ETF) is comprised of top energy stocks. Therefore, XLE fundamental analysis considers the factors affecting the energy sector stocks like market sentiment, earnings reports, energy commodities, energy markets, and the U.S. economy.
The market sentiment is how the investors see the future of the XLE and the U.S. Energy industry. Data from all other factors boil down to a single perception on how these companies will perform in the near future. Based on their analysis, investors decide to buy or sell the stocks in XLE portfolio, which changes the price of the XLE ETF in proportion. Thus, the market sentiment is virtually more important than any other factor as it is the final determinant of the XLE quote.
An Earnings Report is a company’s main performance indicator, showing the revenue, profit, and earnings per share (EPS) figures. XLE constituents release their reports on a quarterly basis. Comparing to the previous quarter and the same quarter of the previous year, investors can understand whether the company is growing or shrinking amid all Energy market events. Since XLE is a market-cap weighted index, XLE price is affected by the high-weighed companies’ earnings reports more than others.
The business of XLE companies revolve around Crude Oil, the main raw material for industrial production, and Natural Gas, the environmental-friendly alternative used for everyday energy. The U.S. benchmark West Texas Intermediate (WTI) is the pricing reference for local and international oil commerce, while 60% of the global oil commerce is based on the European benchmark Brent. Their prices are based on the supply and demand levels in the local and global markets. Fluctuations in the crude oil and natural gas prices directly affect the nominal value of the revenues and profit margins of the energy companies.
The OPEC+ group is the largest trade agreement in the Energy market. It is a 24-country cartel led by Saudi Arabia, representing 44% of the daily oil production and 73% of the global oil reserves. Their size allows them to control the Crude Oil prices worldwide by manipulating supply and demand through decisions to increase or decrease production rates. Thus, the release of OPEC+ meeting minutes has a strong impact on the stock prices of XLE constituents.
Regardless of the underlying reason, when economic powerhouses engage in trade wars, the business activity between them slows down, and the prices of energy commodities fall due to reducing demand. USA-China Trade War saw the clash of the two largest economies and oil consumers. It slowed the manufacturing activities and reduced demand for crude oil in both countries. Moreover, China’s 5% tariff on the U.S. oil, which shrunk the imports more than 40%.
Russia-Saudi Arabia Oil Price War brought two OPEC leaders to a global-scale conflict. Russia’s refusal to participate in the Coronavirus production cuts caused Saudi Arabia to wage a price war. OPEC’s output reached 30-year highs, which oversupplied the market and crashed the Crude Oil prices to levels close to $10 per barrel.
Shale Revolution refers to the technological advancement which enabled extracting kerogen from shale rocks and transforming it into synthetic oil and gas, which can be used the same way Crude Oil and Natural Gas are used. Its discovery in 2011 quickly boomed the production rates in the U.S. and gained control over a third of the U.S. energy market in less than 10 years. Although producing shale oil and gas is costlier and more environmentally harmful than its conventional counterparts, the Shale Revolution enlarged the supply resources of the U.S. and gave it a stronger position in the global oil market.
California and Texas represent approximately 25% of the extraction and processing capacity of the U.S. and are hit by 5 hurricanes every 3 years on average. Hurricanes shut down the oil refineries, causing unprocessed crude oil to oversupply the market, and halt transportation, reducing the gasoline demand.
WTI Crude Oil prices experience extreme volatility and create an unstable environment. Consequently, companies like Chevron and ExxonMobil lose value and cause XLE index price to drop. It takes about two weeks until the energy market recovers from the damage, and the refineries to start working again.
The U.S. Economy
The U.S. government implements environmental policies to mitigate the harm caused by fossil energy production. Policies like consumption limitations, tax hikes, and regulations aim to restrict the fossil energy business and encourage environment-friendly alternatives like solar and wind energy. New policy announcements signify a future downtrend in the profitability of the XLE companies and deteriorate the market sentiment, causing XLE to fall.
Interest Rates and Economic Policies
Fed Interest Rate Decisions and new economic policies affect the U.S. Dollar. Since XLE and constituent stocks are valued against USD, any changes to the currency are negatively correlated in their prices. When interest rates rise, USD gains value and the costs of consumer activities (e.g., commuting) and industrial manufacturing increase. Decreasing demand and USD value shrink the nominal revenue and profit of the energy companies.
There are two key indicators types which must be considered when trading the XLE ETF. Crude Oil Inventories show the weekly changes in the unprocessed crude oil volume, and growing inventories indicate insufficient market demand which deteriorates the XLE value.
Industry Reports of major oil-consuming sectors like manufacturing, transportation, and agriculture help estimate the future demand for energy products and help XLE gain value if expansion is projected.
Elections and Financial Crises
Large-scale political changes like elections and macroeconomic troubles like financial crises draw an unstable projection for the future. In these conditions, the investors often stay away from relatively risky industries like Energy, expecting a slowdown in the consumer activity and business investments until the waters become clear again.
Why Trade Energy Sector XLE ETF with AvaTrade?
XLE ETF has a large trading volume which enables high liquidity and cost-effectiveness. Large-cap-only composition protects the XLE value against the broader market events and macroeconomic changes. However, it also means vulnerability to the price volatility of high-weighted constituents.
XLE ETF’s risk factors are highly salient, making it a good option to trade the Energy market. With AvaTrade, you can enjoy XLE trading with a fully equipped trading platform and a wide range of market updates on the factors which can affect Energy prices.
- Trader Security First: AvaTrade is globally regulated in 5 continents, works with top-tier banks and uses the latest encryption technologies to ensure a secure trading environment for you.
- Easy Access to Markets: CFD trading with AvaTrade allows you to buy and sell XLE ETF shares without having to purchase contracts and pay large brokerage and holding fees.
- Trading Conditions: Leveraged XLE ETF trading with minimal spreads enables all traders to trade XLE with the best ETF trading conditions – remember, however, return & risk potential rise together.
- Energy in Your Pocket: Along with the state-of-the-art MetaTrader 4 and MetaTrader 5 platforms, you can trade XLE and access the Energy sector data everywhere with AvaTradeGO trading app.
- One-Click Risk Management: Use AvaTrade’s built-in risk management tool AvaProtect to hedge your positions using classic options trading tools.
- Professional Support: AvaTrade’s over 14 years of experience in the CFD trading is reflected in the multilingual support for XLE traders through phone, chat, and e-mail.
Participate in the U.S. Energy Revolution
On one side, the Energy sector has been dominated by OPEC and its allies for decades, but their sources are rapidly depleting. On the other side, the U.S. is changing the odds with the Shale Revolution and exercising its greatest trait: never backing away from competition to reach the top. Energy Sector XLE ETF shows how the flagship Energy fleet of the U.S. performs. Now that you learned how the stocks of the largest U.S. Energy companies are propelled by the local and global winds, its time for you to harness the power of Energy yourself and trade with AvaTrade!
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Energy Select Sector SPDR FAQ
- Why should I trade the Energy Select Sector SPDR?
Energy powers everything in the world, and the energy industry is one of the largest as well. Because oil prices have a tendency to be volatile and to trend strongly it can be a good decision to keep an eye on the energy market and be ready to participate when price action is optimal. Rather than watching a number of individual stocks why not just trade the broader market with a fund like the Energy Select Sector SPDR. This gives you diversified access to the energy market and allows you to potentially profit from one of the world’s largest industry sectors.
- Is the Energy Select Sector SPDR the best fund for trading the energy markets?
Because the energy sector is so huge there are quite a few funds you could choose from to trade the energy markets. The Energy Select Sector SPDR may not be the best, you can decide that for yourself, but it is one of the largest and most diversified. That helps provide price stability, and avoids the wild swings you might see in funds that are more focused on a single aspect of the energy market such as natural gas or coal. Plus, you’ll get great liquidity from this fund since so many traders use it to follow the energy markets.
- What’s the best strategy for trading the Energy Select Sector SPDR?
There are many different strategies that can be used to successfully trade the Energy Select Sector SPDR. Those range from fundamental to technical strategies, and from scalping to swing trading strategies. For those who love to keep their fingers on the pulse of the news a fundamental strategy that emphasizes trading around critical news releases might be most successful. Other traders may prefer to analyse the price action of the fund using technical analysis and place their trades based on support and resistance, trend lines, and other technical signals.