After months of strength, oil prices are exhibiting short-term weaknesses, with China imposing additional COVID-19 lockdowns. Analysts are concerned that reduced crude demand could meet with an oversupplied market in the near term.

However, oil stocks are showing a completely different scenario. The Energy Select Sector SPDR Fund (XLE - Get Rating) aims to provide before-expenses investment results that correspond with the price and yield performance of the Energy Select Sector Index companies. The fund follows a replication strategy and offers exposure to the U.S. energy sector.

The ETF has gained 65.3% over the past year, 65.5% year-to-date, and 10.9% over the past three months, compared with the broader SPDR S&P 500 ETF Trust’s (SPY) 12.3%, 15.3%, and 0.7% declines over the same periods, respectively. The ETF closed the last trading session at $91.87. XLE has a five-year beta of 1.57.

Moreover, the EU embargo and the G7 price cap could tighten the oil market just the time when winter hits the northern hemisphere. This could keep investors bullish on crude oil.

Here are the factors that could affect XLE’s performance in the near term:

Fund Stats

As of November 25, XLE has $43.68 billion in assets under management and a NAV of $91.85. It has a gross expense ratio of 0.10%. The fund’s top holdings include Exxon Mobil Corporation (XOM) with a 23.06% weight, Chevron Corporation (CVX) with a 19.50% weight, Schlumberger Limited (SLB) with a 4.86% weight, and EOG Resources, Inc. (EOG) with a 4.43% weight.

Attractive Dividend

XLE’s annual dividend of $3.06 yields 3.33% on prevailing prices. Its dividend payouts have increased at an 11.9% CAGR over the past three years and a 7.4% CAGR over the past five years. The fund has a four-year average yield of 5.53%.

POWR Ratings Reflect Promising Prospects

XLE’s strong fundamentals are reflected in its POWR Ratings. The ETF has an overall rating of A, which equates to a Strong Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

XLE has a Trade, Buy & Hold, and Peer grade of A. In the 45-fund Energy Equities ETFs group, it is ranked #1. The group is rated B.

Click here to see the POWR Ratings for XLE.

View all the top ETFs in the Energy Equities ETFs group here.

Bottom Line

Although oil prices show short-term weakness, the absence of Russian energy exports in Europe could raise prices again, which could support XLE. Given the strong fund stats and attractive dividend payouts, the ETF might be a solid buy now for investors looking to capitalize on the oil market dynamics.

How Does Energy Select Sector SPDR Fund (XLE) Stack up Against Its Peers?

While XLE has an overall POWR Rating of A, one might consider looking at its peers, Vanguard Energy Index Fund (VDE - Get Rating) and iShares U.S. Energy ETF (IYE - Get Rating), which also have an overall A (Strong Buy) rating.

XLE shares were trading at $89.80 per share on Monday afternoon, down $2.07 (-2.25%). Year-to-date, XLE has gained 66.98%, versus a -15.67% rise in the benchmark S&P 500 index during the same period.

About the Author: Anushka Dutta

Anushka is an analyst whose interest in understanding the impact of broader economic changes on financial markets motivated her to pursue a career in investment research. More...

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