NEW YORK ( TheStreet) -- Energy ETFs such as Energy Select Sector SPDR ( XLE) and WisdomTree International Energy ( DKA) offer low valuations and solid yields after trailing the broader market for most of the past 18 months.The story of energy underperformance is perhaps best exemplified by the performance of Exxon Mobil ( XOM). In early July, shares of the oil giant fell below their 2009 lows, hurt by the stock market selloff and a sharp drop in oil prices in the preceding weeks. While other oil firms slid during this period, XOM underperformed other majors such as Chevron ( CVX) and ConocoPhillips ( COP). Even some of the companies involved in the BP disaster, most notably Anadarko Petroleum ( APC), did not fall below their 2009 lows. Earnings estimates for the current quarter have been trending up for Exxon, but the full year and next year estimates have been declining. CVX and COP have also seen a decline in estimates for next year's earnings, though their shares have performed much better. Investors appear to be pricing in a very negative outlook for these companies, with lower energy prices and very slow global economic growth, but oil prices are close to $80 a barrel and natural gas prices have rebounded from their lows, while growth in emerging markets remains robust and is offsetting the slow recovery in developed markets.
In terms of valuation, XOM, COP and CVX trade for roughly 10 times this year's earnings, while yielding between 3 and 4%. They're even cheaper using next year's anticipated earnings, which I think are too low. The ETFs that offer the most exposure to these domestic players are XLE and iShares Dow Jones U.S. Energy ( IYE). Exxon is the largest holding in these energy ETFs by a large margin, which has contributed to the general underperformance of these funds relative to the broader market. XLE is the more balanced of the two, but it still holds 18.4% in XOM, 13.5% in CVX and 5.3% in COP, for a combined 37.2%. Other familiar energy names round out the portfolio, but the allocations quickly drop to 2.6% by number 10 holding APC and down to less than 0.5% for the smallest holdings in this fund. IYE is even more concentrated, despite having more than twice as many holdings at 88. XOM, CVX and COP make up 43.5% of IYE and allocations similarly slide rapidly by the time on reaches the number 10 holding, also APC, with 2.3% of assets. Much of the rest of the portfolio includes companies with small or no dividends at all, so XLE and IYE sport yields of 1.9% and 1.6%, respectively. In addition to having half as many holdings, XLE also has half the expenses, at 0.21% versus 0.47%. For a larger yield, investors can use WisdomTree International Energy. The fund yields 3%, and its fees and holdings are midway between XLE and IYE, at 0.58% and 61. DKA is also a little more balanced, with Total ( TOT) its single largest holding, at 8.3% of assets. However, it does hold two classes of Royal Dutch Shell ( RDS-A) and ( RDS-B), which combine for 12.8% of assets. Country exposure is led by the U.K. and Australia, at 20.8% and 18.2% of assets. France, Norway and Italy each account for 10-12% of assets. Spain, China, Japan, Netherlands, Austria and Portugal make up the bulk of the remaining exposure.
Over the past year, SPDR S&P 500 ( SPY) gained 16%, while XLE, IYE and DKA returned 7.9%, 3.4% and negative 2.0%. Major oil companies including XOM, CVX, COP and TOT start to report earnings this week. Short-term investors looking for a trade may want to wait to see if those earnings prove to be a catalyst, but long-term investors can add shares and get paid while they wait for the sector to rally. -- Written by Don Dion in Williamstown, Mass.
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