Is XLE Still Worth Holding in a Volatile Energy Market?

The Energy Select Sector SPDR Fund (XLE) has long been a barometer for the energy sector, tracking the performance of major oil and gas companies. But in 2025, a year marked by geopolitical tensions, fluctuating oil prices, and a shifting energy transition narrative, the question arises: Is XLE still a viable holding in a high-volatility, low-growth environment? To answer this, we must dissect both the fundamental and technical underpinnings of the fund, weighing its risks and opportunities in a market that remains as unpredictable as it is pivotal.

Fundamental Analysis: A Sector at a Crossroads

The energy sector's fortunes are inextricably tied to oil prices, which in 2025 have oscillated between bullish and bearish forces. Global demand is projected to rise by 720,000 barrels per day (b/d) in 2025, but this growth is expected to slow to 740,000 b/d in 2026 as economic headwinds and clean energy adoption temper demand. On the supply side, OPEC+ has unwound voluntary production cuts, while non-OPEC+ producers have ramped up output, pushing global supply to 104.9 mb/d in May 2025. This surplus has kept inventories elevated, with global stocks rising for three consecutive months to 7,717 million barrels.

Yet, fundamentals are not all bearish. XLE's top holdings—Exxon Mobil, Chevron, and ConocoPhillips—remain resilient. For the quarter ending June 2025, the fund's estimated 3-5-year EPS growth stands at 10.58%, reflecting the sector's long-term earnings potential. Dividend yields remain attractive, with XLE's 30-day SEC yield at 3.25% and the sector's average at 3.50%. However, the fund's recent performance has been mixed: a -8.47% quarterly return in Q2 2025 contrasts with a 0.62% YTD gain.

Geopolitical risks, such as the Israel-Iran conflict, have introduced a wildcard. The conflict has already driven Brent crude to a six-month high of $74/bbl, with further volatility likely if tensions escalate. Meanwhile, macroeconomic factors like the U.S.-China tariff détente and the broader shift toward clean energy are reshaping the sector's long-term trajectory.

Technical Analysis: A Bullish Setup Amid Volatility

Technically, XLE has shown signs of stabilization. As of July 28, 2025, the fund closed up 1.14%, trading at 0.6 times its typical volume. Key support levels at $87.68 and $87.27, and resistance at $88.37 and $88.65, define a consolidation pattern. The fund's technical rating is a strong “buy,” with three bullish indicators (moving averages, RSI, and MACD) and two neutral signals.

The fund is currently in a Bollinger Band Squeeze, a precursor to a potential breakout. Moving averages (50-day and 200-day) are converging, suggesting a possible continuation of the upward trend. The RSI, while not explicitly detailed, is implied to be in a non-overbought range, supporting a bullish bias. Pivot points at $87.96 and surrounding levels further reinforce the idea that XLE is poised for a directional move.

However, XLE's volatility remains a concern. The fund's Sharpe ratio of 0.10 and Sortino ratio of 0.21 lag far behind the S&P 500's metrics, underscoring its high-risk profile. A 7.22% drawdown since April 2025 highlights the need for caution, especially given historical precedents like the 71.54% decline from 2014 to 2020.

Balancing the Equation: Is XLE a Buy, Hold, or Sell?

The answer hinges on an investor's risk tolerance and time horizon. Fundamentally, the energy sector remains a critical part of the global economy, with XLE's top holdings offering robust earnings growth and defensive dividends. The ETF's low expense ratio (0.08%) and high liquidity (AUM of $27.6 billion) further enhance its appeal.

Technically, XLE's current setup suggests a short-term bullish bias, but the fund's historical volatility and risk-adjusted returns caution against aggressive positions. For long-term investors, XLE's exposure to energy transition themes—such as the U.S.-EU $750 billion energy trade deal—could offer asymmetric upside, particularly if oil prices stabilize above $70/bbl.

However, in a low-growth environment, the fund's high beta and sensitivity to macroeconomic shifts (e.g., inflation, interest rates) make it a less attractive core holding. A strategic allocation—say, 10-15% of a diversified portfolio—could balance risk and reward, especially for investors betting on a rebound in energy prices amid geopolitical tensions.

Conclusion: Navigating the Storm

XLE remains a double-edged sword in 2025. While its technical indicators and dividend yields suggest a compelling entry point for patient investors, the sector's fundamental challenges—ranging from supply glut to geopolitical risks—cannot be ignored. For those willing to stomach the volatility, XLE offers a concentrated bet on energy's resilience. But in a world increasingly pivoting toward renewables, the fund's long-term viability will depend on its ability to adapt—or at least coexist—with the energy transition.

For now, the verdict is nuanced: XLE is worth holding for those with a tactical, risk-managed approach, but not for those seeking stability in a high-volatility market. As always, the key lies in aligning the fund's profile with one's investment goals and risk appetite.