Energy Select Sector SPDRXLE

Morningstar Rating

ETF Research and Analysis

by Paul Justice, CFA
Suitability

Given its extremely narrow sector focus, Energy Select Sector SPDR XLE should be treated as a satellite specialty holding to complement a diversified portfolio, albeit one that could be held for several consecutive years. The companies   Read more 

Bull Case

The fund's 0.21% expense ratio is low even by ETF standards.
Portfolio-construction rules are simple and result in very low turnover.
Trading volume is higher than other energy-related ETFs, which could result in lower bid-ask spreads. Though tight spreads aren't a reason to invest here in themselves, they're welcome insofar as they reduce uncertainty associated with any investment. Read more 

Bear Case

The performance of this ETF is highly sensitive to the direction of oil prices, which are impossible to predict.
If the oil-price forecasts embedded in our fair-value estimates are way off, our fair-value estimate for this portfolio will be off as well. That explains why we'd only invest here with a wide margin of safety (that is, when the fund is trading at a steep discount to our fair value estimate).
Given the high concentration in ExxonMobil, the fund will suffer if that company runs into trouble. Read more 

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