If the U.S. stock market was on the lunch menu right now, it would probably be scrambled eggs and Sloppy Joes.
Food preferences aside, the performance of equity ETFs in 2022 is straight messy.
ETFs linked to widely held yardsticks like the Dow Jones Industrials (the SPDR Dow Jones Industrial Average ETF), the Nasdaq-100 (the Invesco QQQ fund) and the S&P 500 (the SPDR S&P 500 ETF) have slid between 5.34% and 13.17% since the start of the year.* Moreover, stock market volatility as measured by the Cboe Volatility Index, or VIX, has surged almost 65% over the same time.
In contrast, energy stocks and ETFs linked to them have been stellar performers.
The Energy Select Sector SPDR Fund (XLE) has jumped 23.37% this year, even as the other nine industry sectors within the S&P 500 have all endured negative performance. The only other industry group with yearly gains is the Financial Select Sector SPDR Fund (XLF), up just 0.46%.
Despite its blistering performance, energy still represents a tiny fraction of the S&P 500’s overall sector weighting.
For example, energy stocks today represent just 3.57% of the S&P 500’s sector weighting. That’s tiny next to the technology sector, the largest industry group inside the S&P 500, which now represents 28.05% of the benchmark.
But even by historical standards, the current weighting of energy stocks within the S&P 500 is low. And much of this can be attributed to market volatility.
“Energy is the most volatile sector inside the S&P 500 in terms of total weight,” said Mike Akins, the founding partner at research platform ETF Action in Denver. According to his firm’s research, the energy sector’s weighting fell from 15% in the early 1990s to 5% in the mid-1990s, then rose again to 15% in mid-2008 and afterward fell to the 3.5% area today. The key takeaway is that energy’s currently low sector weighting inside the S&P 500 could be a sign of the sector’s coming upside expansion.
Higher inflation has buoyed prices for commodities across the board, especially in the energy sector.