Energy Resilience Can Return in 2023 | ETF Trends

Energy is about to wrap up a second consecutive year as the best-performing sector in the S&P 500. Repeating the feat in 2023 will be difficult simply due to the rarity of one sector sitting atop the leaderboard for three straight years.

That doesn’t mean, however, that energy and natural resources stocks can’t deliver upside in the new year. In fact, some analysts are bullish on energy upside in 2023, indicating there could be ample opportunity with exchange traded funds such as the Invesco S&P 500 Equal Weight Energy ETF (RYE).

As of December 15, RYE is already setting a blistering pace, as highlighted by a 51% rise year-to-date. That’s impressive when considering that the large-cap portion of the energy patch is dominated by a small number of behemoths, and with those stocks performing well this year, it stands to reason that some investors may eschew equal-weight strategies. RYE’s performance confirms that would have been a mistake.

Of course, past performance is not a promise of future returns, but some market observers believe that natural resource equities will again perform well in 2023.

“Investors should rotate portfolios to own resource equities. Policy goals across the political spectrum, from resource independence to de-carbonization, all require copious quantities of raw inputs. Opportunities abound in the ‘Resilience Economy’ as more investment in drilling, mining, refining, and distribution will be needed,” according to Bank of America research.

RYE deserves some credit, and not just for its impressive 2022 showing. Over the past three years, the Invesco ETF beat the cap-weighted S&P 500 Energy Index by 460 basis points. Plus, RYE could prove to be a more effective bet in 2023 than commodities-based energy ETFs.

“In our view, resource equities are more attractive than the underlying commodities given operational leverage, vertical integration, and return on capital. Energy and materials sectors have returned 12%/year since 1970 vs. just 7% for commodities,” added Bank of America.

With a fourth-quarter gain of 7.18%, RYE is ending 2022 in strong form, which could set the stage for a strong start in 2023. Adding to that case are expectations for strength in a variety of corners of the energy sector.

“Our strategists are also bullish on resources heading into next year. Francisco Blanch thinks energy market tightness will carry over into 2023 and expects crude oil to average $100 per barrel. Doug Leggate remains selective on oil equities heading into 2023 but sees upstream oilfield services companies and midstream companies as main beneficiaries of still-elevated energy prices,” concluded Bank of America.

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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.