As of May 31, 2015, the Energy Select Sector SPDR Fund (XLE) has an average return of 9.36% since its inception on Dec. 16, 1998. This exchange-traded fund, or ETF, aims to track the price and performance of the Standard and Poor's Energy Select Sector Index. As of July 3, 2015, the Energy Select Sector SPDR Fund has 81.76% of the fund allocated in oil gas and consumable fuels companies; 18.10% in energy equipment and services companies; and 0.10% unassigned.
The Energy Select Sector SPDR Fund aims to track the energy select sector index by allocating its funds similar to the index's top holdings. The Energy Select Sector SPDR Fund's top five holdings are Exxon Mobil Corporation (XOM), Chevron Corporation (CVX), Schlumberger NV (SLB), Kinder Morgan Incorporated Class P (KMI) and EOG Resources Incorporated (EOG). As of July 3, 2015, the weights given to these holdings are 15.79, 12.40, 7.49, 4.44 and 3.86%, respectively.
The Energy Select Sector SPDR Fund is listed on the New York Stock Exchange Arca, or NYSE, and investors can trade the ETF on multiple platforms. XLE is an open-ended investment company, which is managed by SSGA Funds Management Incorporated, or SPDR. The distributor of XLE is ALPS Portfolio Solutions Distributor Incorporated, and the fund is distributed quarterly.
The range of the gross expense ratios of energy equities ETFs is between 0.12% and 0.75%. XLE offers one of the lowest gross expense ratios of its asset class, a remarkable 0.15%. XLE's gross expense ratio of 0.15% is its total annual operating expense ratio, gross of fee waivers and expense reimbursements. This ratio does not include broker fees; investors should keep this in mind.
Suitability and Recommendations
Since the Energy Select Sector SPDR ETF tracks energy companies, investors should pay attention to the prices of crude oil and natural gas, as well as petroleum and natural gas reports published by the U.S. Energy Information Association. Investors and potential investors should pay particularly close attention to the fluctuations of the barrels of crude oil, natural gas and distillates every week.
According to modern portfolio theory, XLE is suitable for value investors. Due to the increase in supply of crude oil throughout the world, crude oil futures prices have decreased by over 50% from June 2014 to June 2015. This caused XLE to underperform the overall market and decrease by 15.89% from May 31, 2014 to May 31, 2015. Therefore, investors may see this as a value investing opportunity and view these stocks as oversold and undervalued.
As of June 29, 2015, the Energy Select Sector SPDR Fund has a trailing three-year alpha of -7.21, beta of 1.14 and an R-squared value of 48.04 against the Standard Index. The standard deviation or volatility and Sharpe ratio of XLE over the same period is 14.25 and 0.50, respectively.
Over the past three years, according to the alpha of XLE, the Energy Select Sector SPDR has underperformed the market by 7.21% due to falling crude oil prices, which caused many energy companies to depreciate in market value.
With a beta of 1.14, XLE is theoretically more volatile than the market, and therefore, the fund carries more risk. Similarly, according to modern portfolio theory, XLE's Sharpe ratio over the past three years has not been providing investors with an adequate return given the amount of risk taken.
Consequently, it may not be a suitable investment for some investors. The Energy Select Sector SPDR Fund is recommended for investors who are interested in getting exposure to the oil and energy sector and want to take on a moderate level of risk.