Sunday, January 24

Energy is the best performing sector to start the year. Here’s how to play it

Talk about kicking off the new year with some good energy.

After getting pummeled in the last few months of 2018, energy stocks are suddenly soaring.

The energy sector is leading the S&P in the first few trading sessions of 2019, up nearly 7 percent as crude oil has rallied back to within striking distance of the $50 mark. The S&P 500 is up just 2 percent in the same time period.

If you want to get in on the energy rally, one expert says there are two ways you can do it using exchange traded funds.

“The easy button here is XLE, the energy select sector SPDR, it’s about $17 billion. It has great exposure to 30 core energy names market cap weighting,” Dave Nadig, managing director of said Monday on CNBC’s “ETF Edge.”

The XLE, which closely tracks the energy sector, is up nearly 15 percent since the market bottoms on December 24. Its top holdings, which make up more than 50 percent of the ETF, include Exxon Mobil, Chevron, ConocPhilips and Schlumberger.

Since Exxon is such a big component of the ETF, Nadig warns that any type of company-specific headline could sway the group in one way or the other. To play the energy space more evenly, Nadig recommended looking at the RYE equal weight energy ETF.

“[The RYE] is an equal weight alternative to [the XLE]. It’s the same core names…so your top 10 exposure is about 35 percent. It’s a lot more broadly exposed. It means that you’re going to catch some of that small cap effect,” he added. Some of the highest ranked names in that ETF include Newfield Exporation, Diamondback Energy, Valero and Phillips 66.

Since equal weight ETFs allocate a portfolio equally – no matter how large or small the stock is – it could be more suseptable to volatility. Meaning when the market sees a sharp swing in one way or the other, the equal weighted ETFs tend to follow suit.

“We tend to see in any equal weighted strategy that smaller or mid-cap exposure tends to give a little more juice on the upside,” said Nadig.

The XLE and RYE were up more than 1 and 2 percent respectively on Monday.

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