Energy stocks are gushing in the second half of the year as the rest of the S&P 500 falls apart. Too bad you probably don't own many of them.
The Energy Select Sector SPDR Fund soared 7.4% just since the end of June — making it the top-performing S&P 500 sector in that time. Energy stocks' second-half rally is even more impressive given that the S&P 500 itself is flat in that time and tech stocks are falling. And don't forget energy stocks' 3.5% yield, which makes the S&P 500's 1.4% look puny and tech's 0.7% look nonexistent.
But if you think you're cashing in on the rally, you might be surprised. Energy stocks only account for less than 5% of the market-valued weighted S&P 500. That's the fourth-smallest weighting among the 11 S&P 500 sectors. It's also a fraction of the S&P 500's nearly 28% weight in tech stocks.
"U.S. oil prices rallied almost 16% in July and reached a year-to-date high earlier in August of around $84 per barrel," said Stacey Morris, head of energy research at Vetta Fi. "The improvement in oil prices has helped drive energy stocks higher. Oil has retreated a bit lately, but it's now only down slightly for the year."
Energy Stocks Pull Ahead Of Big Tech
The rally in energy stocks is even more dramatic on an individual-stock level.
APA, an oil and gas explorer in the Energy Select Sector SPDR, is up nearly 25% just in the second half so far. And it yields 2.4% on top of that. That's a stellar gain in a short period of time, especially as big-cap tech stocks sputter. Shares of Apple are down more than 6% since June. And the tech giant only yields 0.5%.
Additionally, some energy companies are merging and "driving more attention to the sector," Morris said. But investors remain skeptical of the rally. Investors pulled out more than $10 billion this year so far out of the 44 North American energy stock ETFs, says Vetta Fi. That reversed only slightly in the past month, as the energy ETFs took in nearly $1 billion in inflows.
Picking S&P 500 Energy ETFs
For most investors simply looking for broad exposure to the energy sector at a low cost, the energy stock ETF behemoths work well, Morris says. The Energy Select Sector SPDR Fund and Vanguard Energy ETF are the largest by far, with assets of $37.6 billion and $8.4 billion, respectively. With these, you'll own all the major energy companies in the S&P 500.
Some investors, though, might want to drill down a bit. "If investors want energy exposure that is less sensitive to commodity price moves and also provides a more generous yield, ETFs focused on midstream or (master limited partnerships) may be a better fit," Morris said.
Alerian MLP is the largest such ETF, with assets of $6.8 billion. Rather than owning the largest energy stocks, this ETF focuses on cash-flow-generating energy firms, typically those that own and run pipelines. The ETF yields nearly 6%, says Morningstar Direct.
That said, some investors might want to double-down on rising oil prices. If that's the case, an ETF that focuses on oil and gas producers will be more appropriate, Morris says. That includes the SPDR S&P Oil & Gas Exploration & Production ETF. The ETF is up more than 12% since June and yields 2.7%.
Concerned wind and solar will replace traditional energy? Don't count on it anytime soon, Morris says.
"The threat of the energy transition to traditional oil and gas stocks is often overstated. Fossil fuels have been an incredibly stable portion of the energy mix for decades even as renewables have seen tremendous growth," Morris said. "The world needs a lot of energy."
Top-Performing S&P 500 Energy Stocks Since June
| Company | Ticker | Second-half change | Yield |
|---|---|---|---|
| APA | 24.5% | 2.35% | |
| Marathon Petroleum | 22.9 | 2.10 | |
| Schlumberger | 17.9 | 1.77 | |
| Phillips 66 | 17.7 | 3.72 | |
| Halliburton | 17.4 | 1.66 | |
| Pioneer Natural Resources | 13.0 | 11.72 | |
| Diamondback Energy | 12.9 | 4.75 | |
| EOG Resources | 12.6 | 3.33 | |
| Baker Hughes | 12.2 | 2.27 | |
| ConocoPhillips | 11.8 | 4.6 | |
| S&P 500 | -0.1 | 1.41 |
