The energy sector is the best-performing group in the S&P 500 this year. It’s also generating plenty of upside in European and some emerging markets benchmarks, too.
However, plenty of chastened investors remember the drubbing the sector incurred last year during the coronavirus market swoon. They also remember other oil bear markets that stoked significant downside for energy stocks. Still, the allure of the energy sector in 2021 is intoxicating.
Pensive investors face a choice: Embrace a dedicated energy exchange traded fund, which may not be appropriate for all investors, or bank on broad market funds — most of which feature barely any exposure at all. The ALPS Sector Dividend Dogs ETF (SDOG) splits the difference, and it could be a consideration for income investors that want more energy exposure than is found in the S&P 500 while not going all-in on a dedicated fund.
SDOG yields 3.2% and is up 19% year-to-date, but more upside could be on the way in 2022 because the energy sector is still cheap.
“And there may be more to come — the International Energy Agency projects oil demand to recover to pre-pandemic levels in 2022 and the (MSCI Energy) index trades at a 56% valuation discount to the broader market, almost four times the long-run average,” reports Reuters.
There are other reasons that SDOG’s energy exposure could be rewarding. Energy stocks have some catching up to do with spot oil, which is up 60% year-to-date, far outpacing equity-based energy benchmarks. Plus, the sector’s earnings are expanding.
“Earnings optimism is near a 16-year peak. Oil firms in Europe and the U.S. should see profits this year rise 720% to 43 billion euros and 1,300% to $68 billion respectively — the highest of any sector, according to Refinitiv I/B/E/S,” reports Reuters.
SDOG equally weights sector exposures, and today, energy accounts for 11.67% of the fund, or more than triple the S&P 500’s weight to the sector. With oil demand not yet at a top, SDOG could be a useful idea for investors apprehensive about committed energy exposure.
“Now there is absolutely room (for oil stocks) to rise even further as it becomes clear that crude demand isn’t yet at its peak, which I believe we’ll reach somewhere towards the end of this decade,” Angelo Meda, portfolio manager at Banor SIM in Milan, told Reuters.
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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.