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Enthusiasm For Energy ETFs

Enthusiasm For Energy ETFs Like XLE, USO And XLU

Despite all the scuttlebutt that the Federal Reserve is finally nearing its first interest rate hike of 2016, the U.S. Dollar Index has not done much this month, trading slightly lower. On the other hand, oil prices are rallying, which usually does not happen when traders expect the dollar to rise.

For example, the United States Oil Fund LP (ETF) (NYSE: USO), which tracks West Texas Intermediate futures, is up 14 percent since the start of August. That is good enough for an upside move of 7 percent in the Energy Select Sector SPDR (ETF)(NYSE: XLE), the largest equity-based energy exchange-traded fund.

In what could be seen as a sign of what traders are expecting the Fed to do in the coming months, XLE is soaring while the Utilities SPDR (ETF) (NYSE: XLU) is slumping this month. XLU, the largest utilities ETF, enters the final trading day of August with a month-to-date loss of 5 percent. XLU's August swoon has allowed XLE to move ahead of it for top honors among the sector SPDR ETFs this year.

Oil's August ebullience is attracting plenty of followers.

Oil's Appeal

“Oil has surged into a bull market in the past three weeks after falling to a four-month low. That’s attracted cash to the SPDR Energy Select Sector ETF, which is on pace to absorb almost $1 billion in August, the most for any month since April 2015,” according to Bloomberg.

XLE and the energy sector could be drawing renewed interest as investors seek out what they perceive to be the last bastions of value in one of the longest bull markets in U.S. history.

“The energy sector remains the second most inexpensive segment among the ten major S&P 500 sectors, based on the relative valuation measure: the price-to-book (P/B) ratio. As shown in the chart below, the energy sector P/B ratio is currently 30 percent less than that of the S&P 500, and it is close to its 10-year low,” according to State Street.

Conversely, defensive, rate-sensitive sectors such as consumer staples and utilities are viewed as richly valued and vulnerable to pullbacks due to those frothy valuations.

Additionally, some market observers note that when the energy sector is such a small part of the S&P 500, as it is now, that has often led to lengthy rallies in the years after the group becomes one of the smaller weights in the benchmark U.S. equity index.

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