Give Energy The Boot With This ETF

Energy, the seventh-largest sector weight in the S&P 500, has steadied somewhat this year after being the benchmark index's worst-performing sector in each of the previous two years.

Oil's ongoing weakness is not chasing investors from oil ETFs. In fact, that continuing weakness is emboldening some to keep betting on an oil rebound. In fact, the Energy Select Sector SPDR (ETF) (NYSE: XLE) is one of this year's top asset-gathering sector ETF. However, some investors may be opting to keep away from energy stocks.

For those still wary of the energy patch, the ProShares S&P 500 Ex-Energy ETF (NYSE: SPXE) is an avenue for staying long equities while eliminating energy sector risk.

SPXE, which debuted in September as part of a three-ETF suite of ProShares Ex-Sector ETFs, has slightly outperformed the traditional S&P 500 since coming to market.

Related Link: Investors Are Bottom Fishing With Energy ETFs

“Eliminating or underweighting exposure to the energy sector using SPXE could work well with both active and passive funds. Pairing the ETF with an S&P 500 index fund would result in an energy underweight that preserves other aspects of the market-cap weighted index. Combining it with an active U.S. large-cap fund would deliver an energy underweight that preserves the potential for outperformance from the active fund without the need to take a short position,” said ProShares in a new research piece.

With energy out of the picture, SPXE's weights to the technology, financial services, healthcare and consumer discretionary sectors are all at least 100 basis points above those found in the traditional S&P 500 index, according to ProShares data as of November 30, 2015.

“According to Howard Silverblatt, senior index analyst with S&P Dow Jones Indices, excluding the energy sector that was down 22 percent from the broader index would have resulted in a 200 basis point improvement in the year to date gains for the S&P 500 index,” said S&P Capital IQ in a note out late December.

By eliminating the energy sector, SPXE's lineup is comprised of 465 stocks compared to the more than 500 found in the traditional S&P 500. Another advantage of SPXE is that it eliminates the sector that has accounted for the bulk of negative dividend action in the S&P 500 since the start of 2015.

“Energy prices drive energy company earnings, which in turn drive their stock prices. For example, the median forecast for the price of oil in Q4 2016 is just $55 per barrel. While that’s higher than its current prices, it’s still 35 percent lower than the five-year average and roughly half the price that prevailed in the first four of those five years. The oil price forecast translates directly into earnings forecasts for the energy sector, and the contrast with the S&P 500 is dramatic,” added ProShares.

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