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.

ETFs linked to energy commodities—funds such as the United States Natural Gas Fund (UNG) and the United States Oil Fund (USO)—have experienced a sharp rise in prices between 25.46% and 18.05%.

Financial advisors and their clients need to be ready for another development in energy ETFs: society’s transition away from dirty fossil fuels like coal into alternative energy sources like solar and wind power.

“It’s important to position for the energy transition as much as it is to position for some future state of energy markets,” said Paul Baiocchi, the chief ETF strategist at SS&C ALPS Advisors. His firm manages both traditional energy-linked products along with ETFs targeting alternative energy markets.

The ALPS Clean Energy ETF (ACES) captures what many believe will be the future of the energy market. The fund owns stocks in renewable energy like solar, wind and bioenergy. It also includes clean technology stocks in the electric vehicle market and energy management and storage.

Interestingly, there’s a massive performance gap opening between traditional energy and alternative energy funds.

During the past year, the ALPS fund has fallen 43.73% in value while the Energy Select Sector SPDR Fund has climbed 54.23%. The dismal performance of alternative energy ETFs can be attributed to investor sentiment, which is moving away from higher risk growth stocks to more value-oriented stocks.

*All performance data is through the February 17, 2022, market close.