With oil now below $50 a barrel and still in search of a bottom, talk of an energy sector rebound may seem awfully premature.

However, sharp gains in the price of “black gold” may not be all that far off.

A Reuters poll of 30 economists, conducted at the end of December, puts Brent crude back at $74 per barrel sometime this year (from a current $49) and at around $80 a barrel in 2016.

#-ad_banner-#Oil tycoon T. Boone Pickens expects an even greater rebound to $100 a barrel in 12-to-18 months as current low prices stimulate demand and weaker prices force U.S. shale producers to decrease output.

Legendary oil trader and hedge fund manager Andrew John Hall recently predicted $150 oil within five years. As he sees it, the current supply glut won’t last because the U.S. shale boom is set to fizzle out much sooner than expected, with production markedly declining after a 2016 peak.

Even some of the more modest near-term price forecasts still represent significant upside for oil. Analysts at Citigroup, for example, project Brent crude will average $63 this year and $70 in 2016.

A logical conclusion: Despite current weakness, oil is way oversold and could pop soon. That would obviously ignite a steep rally in energy stocks, which have fallen precipitously with oil prices.

I suggest investors prepare for such a rally with the Guggenheim S&P 500 Equal Weight Energy ETF (NYSE: RYE). This exchange-traded fund is the best way to play an energy sector rebound, in my opinion, because it offers diversification with better-than-average upside potential.

The added potential is related to RYE’s benchmark, the S&P 500 Equal Weight Energy Index. The 43 S&P 500 energy stocks within the index are held in roughly equal amounts, not weighted by market capitalization like most indexes. This gives each holding a similar influence on index performance regardless of size, whereas cap-weighted indexing favors large stocks over mid- and small-cap stocks.

Because it doesn’t muffle the contribution of smaller companies, RYE has a major advantage right now. Mid- and small-cap energy stocks have typically fallen much further during the bear market in oil, so I’d expect them to rise a lot more once oil prices recover. With 48.5% of assets in such stocks, RYE would likely rebound more significantly than most of its peers in the equity energy category; rival funds typically allocate only 38% of assets to mid- and small-cap firms.

Since smaller stocks also tend to do better over time, an equal-weight approach should provide a longer-term performance advantage, too. It certainly has for RYE. The fund outpaced 71% of the equity energy category over the past five years, returning 5% annually during that time versus 2.2% a year for its typical peer.

Here are the fund’s top 10 holdings, as of January 13:

Since individual stock prices vary so much, it’s impossible to maintain each holding in precisely the same amount. However, the proportions within RYE are typically very close.

Currently, there’s only a 0.6% gap between the top and bottom holdings — Devon Energy Corp. (NYSE: DVN), which makes up 2.6% of the fund and Southwestern Energy Co. (NYSE: SWN), which accounts for 2%.

Although it’s not apparent from the top holdings list, RYE has positions in the world’s largest energy firms, as well. For instance, the $194-billion (in market value) integrated oil & gas giant Chevron Corp. (NYSE: CVX) occupies 2.4% of the fund. Exxon Mobil Corp. (NYSE: XOM), a $378-billion firm, makes up 2.4%.

The fund also provides exposure to larger, higher-quality oil-services firms that support E&P companies with an array of offerings like drilling rigs, oil and gas transport services, rig maintenance and geological studies. Among the oil services stocks in RYE’s portfolio are Halliburton Co. (NYSE: HAL), Baker Hughes, Inc. (NYSE: BHI) and Schlumberger (NYSE: SLB), each of which accounts for about 2.3% of fund assets.

While the fund’s tilt toward smaller stocks can augment returns, the presence of Chevron, Exxon and other industry giants is important, too, because it helps limit volatility. Indeed, RYE has been no more volatile than its typical peer during the past five years.

At 0.4%, the fund’s expense ratio is low. Its 2% yield is comparable to what you’d get from an ETF that tracks the S&P 500.

Risks to Consider: RYE may display average volatility for an energy sector ETF, but it’s about 80% more volatile than the S&P 500. Because of its correlation with oil prices, the fund is down more than 12% in the past three months alone, compared with about a 8% gain for the S&P.

Action to Take –> Investors should consider energy stocks, while “blood is running in the streets” — especially since the odds of a sector rebound in the near future appear likely. It’s always difficult to call a bottom in these situations, so I suggest establishing a small position in the Guggenheim S&P 500 Equal Weight Energy ETF now, and add to it gradually over the next several months.

If oil, natural resources or commodities are what interests you, look no further than StreetAuthority’s Scarcity & Real Wealth. Our resident natural resources expert Dave Forest has more than a decade’s experience as a trained geologist and analyst. His industry insight allows him to read the markets and provide the most timely, potentially lucrative advice for everything from oil and gold to molybdenum. To gain access to Dave’s latest research, click here.