- Energy producers accounted for $1.9 trillion, or 11%, of the S&P 500’s $17.4 trillion market cap in June 2014
- Since then crude oil futures have plunged 65%, dragging down the energy sector
- Consequently, the link between energy stocks and the broader equities market has diminished
After the selloff in crude oil and producers for over a year, exchange traded fund investors with a diversified broad market investment may be underweight the energy sector.
At their peak in June 2014, energy producers accounted for $1.9 trillion, or 11%, of the S&P 500’s $17.4 trillion market cap, reports Ben Eisen for the Wall Street Journal.
Since June 2014, crude oil futures have plunged 65%, dragging down the energy sector. As of the end of last week energy companies only made up $1.2 trillion, or 6.8%, of the S&P 500 benchmark.
“The longer it falls in price, the less impact it has on the overall market,” Sam Stovall, U.S. equity strategist at S&P Global Market Intelligence, told the Wall Street Journal.
For instance, the SPDR S&P 500 ETF (NYSEArca: SPY) includes a 6.86% tilt toward the energy sector, with only a 1.93% position in Exxon Mobil (NYSE: XOM) among its top 10 holdings.
Consequently, the link between energy stocks and the broader equities market has diminished. Stovall calculated that the energy sector has a monthly correlation of 0.9 with oil prices between 1990 and the present while the broader market’s correlation with oil prices is 0.6.
As oil prices drag on oil company shares, the correlation between stocks and oil potentially weakened to some extent, which may have benefited broad benchmark investments in the event of further crude oil weakness. However, with oil prices rebounding off 13-year lows, investors may be under-allocated toward the energy sector.
Alternatively, ETF investors may augment their equity portfolios with a energy sector play to capture a potential recover. For instance, the Energy Select Sector SPDR (NYSEArca: XLE), Vanguard Energy ETF (NYSEArca: VDE), iShares U.S. Energy ETF (NYSEArca: IYE) and Fidelity MSCI Energy Index ETF (NYSEArca: FENY) all provide market cap-weighted exposure to the energy sector.
Exxon Mobil, Chevron (NYSE: CVX) and Schlumberger (NYSE: SLB) make up about 45% of the underlying portfolios of the energy sector ETFs. The broad energy sector ETFs include a large tilt toward integrated oil & gas companies, along with smaller positions in oil & gas exploration & production, equipment & services, refining & marketing & transportation, storage and drilling.
Energy Select Sector SPDR