The Case for Diversified Exposure to Energy Markets | ETF Trends

Despite the dramatic impact of recent energy price movements on the equity markets, investors should be cautious about making short-term, tactical movements in their portfolios. 

Surging oil prices following Russia’s invasion of Ukraine in late February sparked broad-based stock sell-offs around the world. Investors reacted immediately, concerned that limited energy supplies and higher costs could exacerbate inflation, then jumped back into stocks just as quickly when oil prices began ticking down, FlexShares wrote in a recent insight

Long-term investment success depends on proper diversification across an entire portfolio, as well as within the individual strategies used to achieve an investor’s desired exposures, according to FlexShares.

“For example, a commodities strategy heavily concentrated in oil and gas producers that may have delivered higher returns during February and March of 2022 is subject to higher risk of losses when demand for energy declines,” the firm wrote in a recent insight. “A well-diversified natural resources strategy that includes exposure to other important sectors can provide the inflation-hedging and return potential that investors seek, without taking additional risks related to an energy sector that’s still in the midst of a long-term transition.”

Likewise, the firm said infrastructure strategies should balance investments across sectors to avoid concentration in energy-related industries like pipelines and utilities. Geographic diversification can also reduce risks related to regulations, political activity, and natural disasters.

Two well-diversified funds that may offer protection in volatile markets are the FlexShares Morningstar Global Upstream Natural Resources Index Fund (GUNR) and the FlexShares STOXX Global Broad Infrastructure Index Fund (NFRA)

Volatility driven by short-term swings in oil prices has continued since the start of the conflict, demonstrating the impact of oil prices on investment portfolios. However, investors with exposure to energy-related sectors through commodities and infrastructure strategies likely have experienced a smoother ride.

Choosing well-constructed, well-diversified real asset and infrastructure strategies can help investors increase the odds of achieving their goals under a broad range of circumstances, according to FlexShares. 

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