Energy Stocks: The Heroes Your Portfolio Needs

Energy Stocks: The Heroes Your Portfolio Needs
Carl Hazeley

almost 3 years ago2 mins

Mentioned in story

Investors have been fretting about the risk that inflation will shoot higher because, all else equal, it’ll be bad news for stocks. But not all stocks…

Which sector stands to benefit?

According to analysis by Goldman Sachs, the energy sector – think oil and gas producers – is the best sector to own as inflation accelerates, whether moderately or as sharply as it did last week.

Energy performance with inflation

There are a couple of reasons why. For one thing, oil and gas companies tend to outperform the broader stock market when producer prices (PPI) outgrow consumer prices (CPI). That’s precisely what April’s data showed to be the case in the US, potentially setting the stage for a rally in energy stocks.

Energy performance with inflation

For another thing, commodity prices tend to benefit from rising inflation: Goldman Sachs estimates that oil’s price will end the year some 70% higher than it began. If the bank’s correct, that’ll be a boon for energy companies – adding some 75 percentage points (ppts) to their annual earnings growth – and likely sending their stocks higher still.

A 10% rise in oil’s price adds 11 ppts to European commodities sectors annual earnings growth
A 10% rise in oil’s price adds 11 ppts to European commodities sectors annual earnings growth

How do I buy into the energy sector?

The simplest way for investors to play this opportunity is through exchange-traded funds (ETFs) that track regional or global energy stocks. Depending on where you are in the world, you might want a European-focused fund, a US-focused fund, or a global fund. So here are three options to choose from:

  • SPDR MSCI Europe Energy UCITS ETF (ticker: SPYN) tracks the performance of the MSCI Europe Energy index, and has an expense ratio of 0.3%. It’s up 13% so far this year.
  • Energy Select Sector SPDR Fund (ticker: XLE) offers exposure to the US energy industry at an expense ratio of 0.12%. It’s up 46% this year.
  • iShares Global Energy ETF (ticker: IXC) tracks the performance of an index of global energy stocks. It has an expense ratio of 0.46% and a year-to-date performance of 31%.

Key takeaways

  • Rising inflation isn’t necessarily bad news for all stocks: energy companies could do well as a result.
  • Energy companies tend to do best when producer price inflation is higher than consumer price inflation – like it is right now.
  • Just a 10% rise in oil’s price this year could add 11 percentage points to the earnings growth of European commodities companies, and Goldman Sachs is predicting its price rise to be seven times that.
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