Nearly five months into 2021, it’s fair to say the once downtrodden energy sector is generating plenty of buzz. That’s lifting a slew of exchange traded funds, including the FlexShares Morningstar Global Upstream Natural Resource Index Fund (NYSEArca: GUNR).
For investors previously burned by oil bear markets or those apprehensive about dedicated energy exposure, GUNR is a solid way of splitting the difference. The $5.51 billion FlexShares fund allocates almost 27% of its weight to the energy sector – enough to participate in oil upside without the full commitment.
That’s good news for conservative investors, because some market observers remain bullish on energy. That includes Charles Schwab, which recently upgraded the sector to “outperform” from “market perform.”
“A confluence of factors has increased the likelihood for the energy sector to outperform the overall market, in our view,” said Schwab’s David Kastner. “The fundamental backdrop has improved significantly. Growing demand for oil and constrained supply are bolstering oil prices, and energy companies are being more disciplined with expense and investment—together supporting attractive valuations.”
The Natural Resource Plan
Historically, cyclical stocks perform well as the economy is emerging from a recession. GUNR is levered to that themes with its robust materials sector exposure.
However, energy often performs strongly as the economy enters expansionary phases. GUNR has enough energy exposure to capitalize on that trend. Moreover, the fund’s status as a non-dedicated energy ETF is useful because the sector, despite recent bullishness, is far from a risk-free bet.
“There are numerous uncertainties for the Energy sector, to be sure,” adds Kastner. “One is obviously the movement toward clean energy, which will eventually impact the bread-and-butter fossil-fuels business of energy companies—but this is a long-term risk that gives the companies time to transition to renewable energy. More pertinent risks for our three- to six-month outlook include an incremental rise in regulations, potential surge in the supply of oil, another round of COVID-related drag on demand, and overall market volatility.”
GUNR’s energy exposure is relevant on another front. loose monetary policy and rampant fiscal stimulus is depressing the dollar and ballasting oil prices.
“Loose financial conditions and stabilizing global growth may contribute to continued weakness in the U.S. dollar, which is traditionally positive for oil prices (like other commodities traded internationally, oil is denominated in dollars, so a weaker dollar makes oil more affordable for foreign buyers),” concludes Kastner.
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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.