An ETF is an exchange-traded-fund whose assets are invested in the stocks or bonds of publicly traded companies. Most ETF securities specialize in one industry or enterprise effort. For example, the XLE is an ETF that holds large-cap US energy stocks that are members of the S//P 500 Index. This ETF holds 30 stocks and has a current market cap of $23.2 billion. For the first half of the 2019 year, the ETF was up 10.4%, not including dividends. Like all ETF securities, the XLE masks good and bad performance among the 30 component stocks. For example, Anadarko Petroleum (“APC”) is up 62% for the first half of the year since it was the subject of a bidding war between Chevron and Occidental. As many observers expected, the Occidental stock has been weak since its merger announcement with the OXY shares down 20% during the first half of 2019. In fact, only nine of the 30 stocks in the ETF are down for the first half of the 2019 year and OXY stock is the worst performing stock in the ETF for the first half of this year.
Investors can use this disparate performance of an ETF’s components to look for oversold values within a single industry. In the case of XLE, there are three other stocks down at least 10% for the 2019 year. Those stocks are Hollyfrontier (HFC), Halliburton (HAL) and National Oilwell Varco (NOV) and each one of these relatively weak market performers could represent a possible oversold opportunity within the energy sector. Many factors need to be examined (earnings, management changes, dividend philosophy, etc.), but investors looking at the energy sector might find attractive investment candidates by looking at the companies whose stocks have recently underperformed and may be setting up rebound in performance. Similarly, an investor looking at the energy sector might use this ETF performance data to avoid investing in stocks whose recent positive performance might be overdone and subject to a stock price correction.
In either case, looking inside an ETF to review the performance of the individual components can be a source of investment information and ideas, apart from the actual performance of the ETF itself.