Five Investments to Own in 2018: #3 XLE

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With 2018 just a few days away, it’s time to deliver the third installment in our series Five Investments to Own in 2018. But before we dive in, let’s recap …

In our first installment, I pointed out how owning the broader market as we drive in 2018 is pretty much a no-brainer. A terrific way to play it is with the S&P 500 SPDR ETF (SPY).

In our second installment, I told you about some of the biggest risks to your investments in 2018, including owning SPY. Adding some gold to your portfolio via GLD should make you feel a bit better.

Make sure to read both issues carefully.

Now, to our third investment for 2018 …

Energy Looking Good in 2018

Stack the biggest sector ETFs against one another and you get a pleasant surprise. Across nearly every major category – from technology (up 33%) to consumer discretionary (up 22%) to industrials (up 21%) – year-to-date (YTD) performance is humming along nicely.

Except one: Energy and the Select Sector SPDR (XLE).

Its YTD return doesn’t just lag its competitors: It’s actually down about 4% since the beginning of the year. That’s the only sector in the red. See for yourself …

XLE Table Burritt Research Financial Writing
Source: Select Sector SPDR

But the fate of the energy sector and the XLE is about to change. Here’s why …

While not perfectly in sync, the energy sector and the XLE tend to track the price of oil. And the way I see it the outlook for oil is cautiously bullish. Here’s why …

  • OPEC production cuts are usually pretty sketchy, but so far they’ve worked. And with agreed-upon cuts good for this year (pending a review in June), my bet is they’re likely to hold.
  • U.S. oil producers have remained pretty disciplined as well, with rig counts trending modestly lower.
  • Demand metrics are pretty positive in the U.S., with growth and other indicators looking positive.
  • Rising geopolitical uncertainty and other risks – of which there are a ton (see out last issue) – tends to be bullish for oil.

But there’s more …

Since the end of June, oil is up over 40% to a recent price just shy of $60 a barrel. Compare that to the broader market’s rise of 10% and it’s clear that oil is gaining momentum. And that’s momentum is eventually going to pull energy up with it.

A good way to play the potential move in energy is the XLE. It’s the largest of the energy ETFs and is a virtual “Who’s Who” of the energy sector. Plus, it has excellent liquidity: You should have no problem getting in and out of your trade.

Plus, you can trade options on the XLE, if you’re looking for more leverage and potential profits. But don’t forget options come with a higher degree of risk.

And finally, the XLE boasts a yield of 3.05%. That’s an outstanding return, and far outpaces the 1.9% for the S&P 500.

If you haven’t already, don’t forget to sign up for our Investor Insights mailing list. It’s free and we’ll be able to deliver these issues right to your inbox.

Happy Investing,

Wayne

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