Inflation is taking off faster than it has in 40 years — a concern that’s getting real this year. And so far, just one corner of the market and S&P 500 is thriving: energy.
The nearly $30 billion in assets Energy Select Sector SPDR Fund (XLE) is already up 14% this year going into Thursday. That’s miles ahead of any other S&P 500 sector. Financials are a distant second, up just 6.1% in that time. Both are topping the SPDR S&P 500 ETF Trust’s (SPY) nearly 1% fall this year so far. Gold and cryptocurrencies are no match either: They’re down.
And the energy sector is even topping gains in the price of oil itself. The United States Oil Fund (USO), which tracks crude prices, is up just 8% this year. And S&P 500 energy stocks on average pay an additional yield of nearly 4% on top of that.
“Historically, high inflation has tended to yield outperformance by the energy sector,” said Stewart Glickman, energy analyst at CFRA Research.
Inflation Lights Up Fear In The S&P 500
Bold moves by the government to goose the economy threatened higher prices for years. But now, it’s showing up in the data. And it’s a perfect call to own commodity-exposed investments, namely energy stocks, says Robert Maltbie, portfolio manager at Singular Research.
Inflation jumped 7% in 2021 from the previous year based on the Consumer Price Index data out on Jan. 12.
“The headline inflation number this morning is eye-popping … the highest since 1982,” said LPL Financial Asset Allocation Strategist Barry Gilbert. “While it doesn’t change the Fed’s timeline, we could still see interest rate lift-off as early as March.”
But now, it’s all about energy.
Doing Even Better With Energy
Just looking at the S&P 500 energy sector’s performance this year doesn’t even show the full magnitude of its dominance as inflation heats up.
All 10 of the top-returning sector ETFs this year are in the energy sector. No. 1 of them all is the VanEck Oil Services ETF (OIH), which returned nearly 20% just this year so far, says Morningstar Direct.
Even if you look at the full universe of more than 2,800 ETFs, seven of the top 10 performers this year are energy related. What’s up more than 50% in 2022 so far? Not the Bitcoin ETF, but the MicroSectors US Big Oil 3X Leveraged fund (NRGU), which magnifies the sector’s move by three times.
It’s actually hard to not make money in energy ETFs. The top 10 largest energy ETFs are up more than 13% this year, on average. They yield an average 2.4% to boot.
Other S&P 500 Safe Havens Aren’t Working
The surge in inflation isn’t leaving many safe spots for investors outside of energy.
Even gold, a supposed favorite in inflationary times, isn’t holding up. The SPDR Gold Trust is down 0.4% this year. And eight of the 11 S&P 500 sectors are down. That makes energy’s strength all the more alluring.
Real estate is rolling over, too. The Real Estate Select Sector SPDR (XLRE) is now down more than 5% this year so far. It had been seen as an inflation winner until recently and was among the top gainers in 2021.
And Bitcoin isn’t living up to its hype as an inflation beater, either. The new ProShares Bitcoin Strategy ETF (BITO) is down 4.4% just this year. Right now, investors are only looking to crucial valuables you pull out of the ground, namely oil.
Maltbie suspects inflation could keep running, along with energy stocks, as the Federal Reserve is powerless to contain it. Many inflationary pressures are due to government policies that won’t undo themselves with higher short-term interest rates. “The Fed is irrelevant,” he said.
Others, though, think it’s still in the Fed’s plan to tamp down inflation, eventually.
“Markets are largely focused on inflation because of its impact on how quickly the Fed might tighten monetary policy,” said LPL’s Gilbert. “With inflation at 7% and the unemployment rate at a healthy 3.9%, it’s no surprise that the Fed has pivoted toward tightening.”
Energy Surges Amid Inflation
All the largest energy ETFs are rallying this year already
|ETF||Symbol||Assets ($ billions)||YTD % ch.||Dividend yield|
|Energy Select Sector SPDR Fund||(XLE)||$29.8||14.1%||3.7%|
|iShares U.S. Energy||(IYE)||2.7||12.7||2.4|
|Fidelity MSCI Energy Index||(FENY)||1.1||14.1||3.4|
|First Trust Nasdaq Oil & Gas||(FTXN)||1.1||13.8||1.0|
|First Trust Energy AlphaDEX Fund||(FXN)||0.5||11.2||0.8|
|Invesco S&P 500 Equal Weight Energy||(RYE)||0.3||15.4||2.1|
|Invesco DWA Energy Momentum||(PXI)||0.1||14.0||0.5|
|Invesco S&P SmallCap Energy||(PSCE)||0.1||15.7||0.4|
|Pacer American Energy Independence||(USAI)||0.1||8.7||5.8|
Sources: IBD, S&P Global Market Intelligence, ETF.com
Follow Matt Krantz on Twitter @mattkrantz
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