Why XLE’s Fund Flows Have Shown Major Fluctuations

Energy Strategy Recap for Week Ended June 12

(Continued from Prior Part)

Fund flows for XLE turn negative towards end of May

Fund flows into the Energy Select Sector SPDR Fund (XLE) have turned into a new outflow towards the end of May 2015, as the graph below shows.

While fund flows were relatively lower between 2012 and 2013, they started climbing in mid-2014. The sharp spike in late 2014 probably demonstrates bargain purchases made by investors in the hopes of a long-term rebound. A close observation shows that the market was taken a bit by surprise by the collapse in oil prices, an early re-entry into the market in the beginning of 4Q14, and then an early exit in 1Q15. Markets tend to get whipsawed during inflection points in trending markets. Trends work, until they don’t.

The nature of XLE’s fund flows

The previous graph indicates a sharp withdrawal of funds from XLE in May. While January and April were largely characterized by an inward flow of funds into the XLE, this has been accompanied by withdrawals. Overall, the trend of fund flows is pointing to a decrease in the large inflows. In a scenario where oil resumes its long-term downward trend, fund outflows can begin to breach the $300 million mark set in February and March, creating excess volatility in large-cap energy ETFs like XLE.

Fluctuating fund flows for XLE were driven by high uncertainty in oil prices

Lack of clarity on oil prices so far in 2015 is primarily contributing to the trend of fund flows into the XLE or lack thereof. Following the OPEC (Organization of the Petroleum Exporting Countries) meeting, Middle East oil-exporting countries are continuing to pump record quantities of oil, as per a report by the International Energy Agency in the week ended June 12.

With oil supply expected to exceed demand, traders are reportedly losing faith in the brief rally in oil during the past two months. In the week ended June 19, net-long positions in WTI (West Texas Intermediate) crude oil held by hedge funds were trimmed by ~4%, as per data from the US Commodity Futures Trading Commissions. Long positions dropped to their lowest levels in five months.

In the next part of this series, we’ll cover the price-t0-earnings ratio trends in chosen stocks in XLE’s portfolio, namely National Oilwell Varco (NOV), Williams Companies (WMB), Cameron International (CAM), and Kinder Morgan (KMI), which have weights of 1.6%, 3%, 1.1%, and 4.4%, respectively, in XLE.

Continue to Next Part

Browse this series on Market Realist:

• Part 1 - Energy Sector Hedge Funds and ETFs Show Mixed Results Last Week

• Part 2 - Energy Sector ETFs Lagged behind Benchmarks Last Week

• Part 3 - Greek Debt Crisis and Surplus Oil Supply Impact Energy Stocks