Oilfield Services Lift Energy Sector as Quality Remains Thin

The Energy sector rose on Friday, August 28 as oilfield services led the advance, even though the group's quality mix remains heavily tilted toward lower-graded peers. The Energy Select Sector SPDR Fund, an exchange-traded fund that trades under the ticker XLE, gained +0.6% to close at $62.68, matching the cap-weighted sector's +0.6% gain. Market breadth was constructive, with 66.7% of sector members advancing, despite just 17.3% of the fund's graded weight sitting in companies with A or B quality grades. The advance gained momentum as investors reacted to reports of potential energy project expansions in Venezuela, lifting expectations for drilling activity.

Services and equipment providers accounted for the sharpest gains in the sector. Schlumberger NV (+4.2%) and Halliburton Company (+1.9%) drove the advance amid expectations that U.S. companies could secure new drilling and equipment supply agreements. That corporate news helped the group decouple from physical commodity prices. Crude oil futures fell on the session, weighed down by hawkish interest rate commentary from the Federal Reserve and discussions regarding shipping flows in the Strait of Hormuz.

While expectations of tighter monetary policy weighed on broader equity indexes, Energy held its ground as 5 of the 11 sectors rose. The sector's cap-weighted return of +0.6% slightly outpaced its equal-weighted return of +0.4%, showing that larger industry heavyweights provided a bit more lift than smaller components. Not all constituents participated in the advance, however, with Texas Pacific Land Corporation (-1.4%) finishing lower.

Investors tracking the sector through XLE, which carries an expense ratio of 0.08% across $39.2 billion in net assets, have seen the fund gain +6.3% over the past month despite that narrow high-grade footing. EasyAlpha grades each company against its industry peers. Across the sector, only 17.3% of the fund's graded weight lands in companies graded A or B. Companies graded A or B have stronger fundamentals, and historically they have carried a lower risk of large drawdowns than companies graded D or E.