The energy sector is the worst-performing group in the S&P 500 this year and that ominous competition isn’t even close. As of April 24, the S&P 500 Energy Index is lower by 42.34% year-to-date and although the sector’s weight in the S&P 500 is dwindling, the group is still weighing on the benchmark’s performance.
Investors can avoid that phenomenon with the S&P 500 Ex-Energy ETF (NYSEArca: SPXE). Excluding energy is proving meaningful this year as SPXE is outperforming the S&P 500 by about 160 basis points.
“An investment in the S&P 500 that excludes a particular sector gives you the flexibility to tailor your core U.S. equity exposure,” according to ProShares. “It can replace a traditional S&P 500 fund, allowing you to underweight or even eliminate a sector in your portfolio.”
SPXE Is Proving Special This Year-to-date
However, energy equities are in an extended period of decline, so much so that the sector has become one of the smallest in the S&P 500. Said another way, a case can be made that SPXE is actually a fairly accurate representation of the benchmark domestic equity gauge.
“Energy has been the worst-performing sector in the S&P 500 this year,” notes ProShares. “This year, through 4/21, Energy contributed -1.81% to the return of the S&P 500 and returned -45.11% for the period. Given recent trends like oil futures turning negative, the pain may not abate soon.”
The broader risk-off selling and fears of a slowing global economy due to a spreading coronavirus contributed to the weakness in energy markets. The sell-off also steepened after discussions between the Organization of Petroleum Exporting Countries and its ally Russia broke down, with Saudi Arabia directing its oil company Aramco to raise its maximum production capacity in a bid to squeeze out competitors.
Additionally, the rise of alternative energy isn’t a passing fad. Renewables are here to stay and with the cost of an adoption falling, investors may be inclined to continue eschewing traditional energy fare.
“Legacy energy companies’ financial fortunes may be on the wrong side of history,” according to ProShares. “Increased efficiency & access to renewables, institutional investors’ move to sell fossil fuel holdings, and public policies seeking to mitigate climate change may reshape energy consumption forever, potentially impacting the bottom line of energy sector businesses for years to come.”
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.