Rising Oil Prices Bode Well for Energy ETFs

S&P says its equity analysts have a positive fundamental outlook on the integrated oil & gas industry, which makes up more than half of the market cap of the sector.

Gasoline makes up 3% of the average U.S. household budget, according to David Wyss, S&P chief economist. Overall energy costs comprise 6% of the average household budget, including gasoline, electricity, and natural gas.

The energy sector's recent valuation of 13.1 times estimated 2011 earnings per share (EPS) is below the 500's P/E of 13.6, as the unpredictability of oil prices leads investors to generally assign this sector a lower valuation than the broader market. The sector's P/E-to-projected-five-year EPS growth rate (PEG) ratio of 0.9 is below the broader market's 1.

ETF investors have a wide variety of choices when it comes to the energy sector. There are two dozen energy ETFs offering access to strategies that target both domestic and international equities. Most of these funds focus on large oil and gas companies, though some own small-cap, natural gas, or coal companies.

Four of these funds — State Street's SPDR Energy Select Sector ETF, iShares S&P Global Energy Sector Index ETF, iShares Dow Jones US Energy Sector Index ETF, and Vanguard Energy Index ETF – have an "overweight" recommendation from Standard & Poor's, which assess ETFs using 10 different metrics measuring performance, risk, and cost.

The ETFs are substantially similar in terms of their underlying holdings.

The State Street ETF is the largest and least expensive to own, followed by Vanguard, while the iShares S&P Global ETF has the largest dividend yield. Performance among the group has been highly similar as well, though the iShares S&P Global ETF has underperformed the others over the past year.