One month into the new year, the S&P 500 Energy index is up almost 3% to start 2023 and up near 40% for the past year. The energy sector was one of the rare shining stars in 2022, but what goes up must eventually come down, which warrants an equal weight strategy.
As indicated in the S&P 500 Energy index’s performance within the past year, the sector experienced strong upside the previous year as rising inflation fed into higher energy prices. Now, the expectation is that the U.S. Federal Reserve will begin dialing back its interest rate hikes as it seemingly has inflation under control, but that could change.
There’s no doubt that the energy sector has been on an absolute tear the past couple of years, but all good things must come to an end. Investors can still capture any remaining upside in the energy sector and minimize volatility with an equal weight strategy.
“The past two years it has blown away every other sector in the S&P 500, returning 55% in 2021 and 66% in 2022. For all of those organizations that divested your energy stocks, that was a costly decision,” a Forbes article noted. “Barring a collapse in oil and gas prices, I think the energy sector will have a decent year. But I don’t think it can keep up with the pace of the past two years. There are signs that other sectors are starting to pull ahead of the energy sector.”
Capture Upside, Minimize Volatility
If the energy sector still has room to run, for investors who want to extract additional gains while also limiting volatility can take a look at the Invesco S&P 500 Equal Weight Energy ETF (RYE). The fund employs an equal weight strategy that can help minimize concentration risk, so investors are not too heavy on one stock.
The energy sector in particular can experience momentous moves. As per the fund description, RYE seeks to track the investment results of the S&P 500® Equal Weight Energy Index, which is composed of all of the components of the S&P 500® Energy Index, an index that contains the common stocks of all companies included in the S&P 500® Index that are classified as members of the energy sector, as defined by the Global Industry Classification Standard (GICS).
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