IYE: U.S. Elections Results Don't Matter, The Energy Sector's Outlook Remains Strong

seekingalpha07-29

curraheeshutter Investment Thesis 2024 is a crucial year that will define the course of the U.S. for the next four years, and markets have already begun to assess course trajectories by reallocating ...

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A few forces in the post-pandemic era have provided a boost to the energy sector, with oil prices briefly hitting decade-highs in 2022. Since then, oil prices have been locked in a tight range as the energy sector posted a mixed bag of results through 2023. For now, the energy sector is lagging the broader markets, as seen in Exhibit A below. Exhibit A: The U.S. Energy sector is so far marginally underperforming the broader market indices on a year-to-date basis (Seeking Alpha) However, with 2023 in the rearview mirror, I believe the outlook for the energy sector remains strong as investments ramp up and demand for oil is expected to expand, leaving the energy sector as a strong contender for investment capital. The iShares U.S. Energy ETF (NYSEARCA:IYE) is one energy-focused ETF that could benefit from the strong multi-year demand outlook I hold for the energy sector. Unfortunately, my analysis of the ETF shows that investors would benefit from allocating capital to IYE’s peers to take advantage of the strong energy sector outlook. For now, I continue to rate the IYE ETF as a Hold. Recap of the iShares U.S. Energy ETF In my previous coverage of the IYE fund, I analyzed the ETF by looking at various factors such as past performance, fees, and relative strength and arrived at the conclusion that “there are better alternatives to gain exposure to the U.S. energy industry.” While IYE could still have room to grow given my positive outlook, I argued that many of IYE’s peers would outpace the IYE fund based on the metrics that I had looked at. My analysis today recaps the IYE ETF since my previous coverage. The BlackRock-managed IYE fund continues to allocate capital in a way that provides investors with exposure to the oil & gas sectors. The fund’s capital is allocated towards U.S. companies that are primarily involved in the production and distribution of oil & gas. According to its updated fund literature, the IYE ETF achieves its fund objective by continuing to track the quarterly balanced Russell 1000 Energy Index. I had discussed the index’s capped-weightage methodology in my previous coverage, and that has not seemed to have changed since then. In Exhibit B, I observe the top 15 holdings vs. breakdown of the fund’s assets by sector and other factors. The Top 15 holdings account for ~80% of the fund’s assets. Exhibit B: Top 15 holdings for the iShares US Energy ETF (IYE) (etfdb) Peer Comparison In this analysis, I have compared the IYE fund to two of its peers: Invesco’s S&P 500 Equal Weight Energy ETF (RSPG) and First Trust’s Nasdaq Oil & Gas ETF (FTXN), as demonstrated in Exhibit C. Exhibit C: The IYE fund vs its peers (Seeking Alpha, etfdb) In comparison to some of its peers listed in Exhibit C, the IYE has a reasonable expense fee, charging investors 40 cents for every $100 invested in the fund. The IYE fund is also the most active and the largest fund among its peers listed above, with $1.3 billion in assets managed. Note that there are larger energy-focused ETFs that I have covered, such as the Energy Select Sector SPDR Fund (XLE) and Vanguard’s Energy Index Fund ETF (VDE), which are cheaper than the IYE. The real difference lies in the performance of the funds, especially on the long-term investment horizons, as noted in Exhibit C above and Exhibit D below, where the IYE fund gets outperformed by its peers consistently. Exhibit D: The IYE fund lags some of its peers such as the equal weighted RSPG over long-term investment horizons (Seeking Alpha) Outlook & Valuation The outlook for energy remains as strong as ever, with forecasts pointing to an average growth of 1.4% per year in oil consumption through FY24. Strong consumption trends are usually positive for oil & energy companies, such as those in the IYE, which produce and distribute oil to support these consumption trends. Exhibit E: Global Outlook for Energy Consumption (EIA) In addition, should the incumbent government fail to win the upcoming U.S. elections, a change of guard at the White House will usher in a revamped energy policy that would see an increase in oil & gas production similar to prior presidential tenures, a shift away from the current administration's curbs on oil production. I expect this to provide an additional boost to the energy companies. Currently, the IYE fund is valued at ~12x earnings, per its latest fund document. Morningstar estimates the long-term earnings growth for the IYE to be ~9.7%, slightly below the 9.9% for the category average, indicating the IYE is currently fairly valued. On the other hand, IYE’s peer, the RSPG, appears to be relatively undervalued to the IYE since it is trading at 12.6x earnings, with RSPG’s long-term earnings growth estimated to be ~14%, far more than the long-term earnings growth rates of the IYE and the energy category averages I mentioned earlier. Factors To Consider When Investing In IYE The rapidly changing narratives arising from varying policy considerations from both participants in the U.S. election are expected to impact energy stocks this year. This would create elevated volatility since energy policy is usually a key component in every U.S. presidential candidate’s manifesto. While I expect the long-term outlook to keep the energy stocks buoyant, a win by Republican candidates will add a boost to the energy stocks. Takeaway The global outlook for energy demand remains robust, with oil barrel consumption expected to increase in single digits through the next few years. This portends favorable business conditions for energy companies, such as those in the IYE fund, that produce and distribute oil and gas to support the expected energy consumption. The U.S. election cycle this year is expected to create short-term volatility to impact the outlook this year. While I am bullish on the energy sector, I continue to hold out on the IYE fund because my analysis continues to show that there are still better opportunities in energy outside of the IYE fund.  I continue to recommend a Hold rating on the IYE fund.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.1","shortVersion":"4.29.1","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2455800226"}