After being the top-performing sector last year, energy is the worst-performing sector so far in 2017―and it isn't even close.
The $15.7 billion Energy Select Sector SPDR Fund (XLE), the largest ETF tracking the sector, is down 14% year-to-date. That's double the loss of the next-worst-performing sector―telecom―and well behind the more than 8% gain for the broader S&P 500 in the same period.
It's increasingly clear that the rebound in energy that many expected in 2017 is unlikely to come to fruition, for a number of reasons.
The most obvious factor weighing on the energy sector is the surge in U.S. oil production. Since the start of 2017, crude oil production in the country climbed more than 6%, or 500,000 barrels, to 9.3 million barrels per day―a two-year high.
What those figures suggest is that not only can U.S. oil producers weather sub-$50 oil prices, they can thrive with them thanks to advances in technology and lower costs. The International Energy Agency (IEA) anticipates that production at the end of 2017 will be 920,000 barrels per day higher than at the end of 2016, and that it will grow another 780,000 barrels per day by the end of next year.
These are the types of growth rates witnessed when oil prices were above $100 a few years ago, and not something many would have anticipated in today's much lower oil price environment.
Of course, rapidly expanding output is great for U.S. oil producers at an individual company level. But when everyone is growing their production by leaps and bounds, it's naturally going to drag oil prices down, hurting the whole sector.
That's exactly what's happened as WTI crude oil futures sagged by 17.7% year-to-date and the front-month tracking United States Oil Fund (USO) dropped by 22.4%.
Spooked by the wave of supply coming from multiple sources, many Wall Street analysts have grown bearish on the energy sector.
“It is now consensus that global oil markets will swing into surplus in 2018, and the burden of proof that this will not happen lies with the bulls," said Ole Slorer, U.S. oil services analyst at Morgan Stanley.
With these gloomy forecasts in mind, it's not hard to imagine why energy is performing so poorly this year and why it may continue to face head winds going forward. That said, there's always a more optimistic case to be made, if only for purposes of playing devil's advocate.
In that regard, one thing to consider is that the increase in oil production from Libya and Nigeria may not prove to be sustainable. As the IEA points out, given the nature of these two unstable countries, the recent increase in production there "could easily fall back."
New Vanguard CEO Named
Vanguard announced late last week that Chief Investment Officer Tim Buckley has been named president and director of the index fund giant. As of Jan. 1, 2018, he will also succeed Bill McNabb as Vanguard’s fourth chief executive officer since it was founded in 1975.
“Vanguard has helped to bring cost savings to many fund investors, including those that have chosen a different asset manager to work with. Vanguard tends to have among the lowest-cost products in their investment style and regularly lower fees, benefiting from its scale,” said Todd Rosenbluth, director of ETF & mutual fund research at CFRA.
Vanguard is the second-largest ETF issuer, with $736 billion in assets under management (AUM) in its 70 ETFs. It was the first firm to promote index funds for retail investors, with the Vanguard 500 serving as its flagship product. Across all its products—which include more than 300 mutual funds and ETFs—the firm manages $3.8 trillion, according to the press release.
China Firm Buys KraneShares Stake
ETF issuer KraneShares says it has signed an agreement to sell a 50.1% majority stake in the company to China Investment Capital Corporation (CICC), a China-based financial services firm with subsidiaries in New York, London, Hong Kong and Singapore.
KraneShares is a fairly small boutique-style ETF issuer offering only five funds and barely scraping into the top 40 of U.S.-based ETF issuers, with $765 million in assets under management. However, the firm is laserlike in its focus on China ETFs.
The firm’s largest fund is the KraneShares CSI China Internet ETF (KWEB), with $542.2 million. It is the only fund to offer pure-play exposure to China’s internet companies.
The acquisition by CICC will lend the small ETF issuer some bigtime firepower when it comes to resources and research, but it also gives CICC an entry into the exploding U.S. ETF market.
Drew Voros can be reached at firstname.lastname@example.org.
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