logo

Energy is one of June's best-performing sectors, but the rally may be running out of steam

VIDEO2:2802:28
Energy names are losing S&P 500 market cap to tech - Here's how to invest in the sector

Call it a case of bad energy.

Morgan Stanley drilled into the energy sector with a note Monday that lowered price targets on many energy names. This dragged the XLE energy ETF  down almost 1 percent on a day when geopolitical tensions increased as President Donald Trump imposed new sanctions on Iran, one of the world's key oil producers.

The energy sector has seen an 8 percent rally in June, with the XLE up 10 percent year to date after falling from its year to date highs in April.

WallachBeth's Andrew McOrmond said Monday on CNBC's "ETF Edge" that the fundamentals are looking a little too slick for energy names. He points out that the XOP, the oil and gas exploration ETF, has actually seen a bigger gap with oil in the last few days than normal.

"In last five days, [the XOP] has gapped at a 6 percent spread from oil, and traditionally that's 1 percent," he said. "I think that's been dragging down these ETFs."

Since 2007, energy stock's weighting in the S&P 500 dropped from 15 percent of the index's stocks to just 5 percent today. DataTrek's Nick Colas says given the outlook for oil and energy stocks, that's the exactly how investors should be weighing the sector in their portfolios.

"You hold the 5 percent weighting, which is the S&P weighting, and you go on autopilot and rejoice in the fact that lower oil prices are good for the U.S. economy," he said on "ETF Edge."

On Monday, oil still hovered at its highest level in almost a month. The XLE is still about 8 percent down from its 2019 high in April.