Market Overview

3 Broad Market ETFs For Investors Looking To Dodge Energy Stocks

3 Broad Market ETFs For Investors Looking To Dodge Energy Stocks

The energy sector is the worst-performing group in the S&P 500 this year and as a result, its heft in widely followed equity benchmarks is dwindling.

Energy's weight in the S&P 500 is just 2.89%, good for a multi-decade low. Only the materials sector at 2.45% accounts for less of the benchmark domestic equity gauge. As is being widely documented, despite energy's waning impact on some popular indexes, it's still a major part of some exchange traded funds – a part that's dragging those funds lower.

“Despite the sharp drop in relative weighting in the last few years, CFRA continues to have fundamental concerns for the energy sector,” said CFRA Research Director of ETF & Mutual Fund Research Todd Rosenbluth in a recent note. “The Covid-19 virus forced large-scale closure of many parts of the economy, decimating oil demand and collapsing prices.”

Fortunately, there are some broad market ETFs that are light on energy stocks.

Reverse Cap Weighted U.S. Large Cap ETF (RVRS)

The Reverse Cap Weighted U.S. Large Cap ETF (CBOE: RVRS) is a unique spin on S&P 500 exposure because it literally flips the script on that index by assigning larger weights to its smaller components. That's a benefit when it comes to avoiding big energy stocks because many of the index's energy holdings are large-cap stocks.

Perhaps surprisingly, RVRS is actually overweight energy stocks relative to the S&P 500 at just over 6%, but that's augmented by a substantial overweight to the consumer discretionary sector.

Invesco S&P 500 Equal Weight ETF (RSP)

The Invesco S&P 500 Equal Weight ETF (NYSE:RSP) is the king of equal-weight ETFs, but even that methodology can lead to an overweight to the energy sector. In RSP's case, it's 3.7%, but the downtrodden sector is the smallest in this fund.

“Energy’s relative importance in the broader equity markets has shrunk in recent years, as more growth-oriented sectors, such as Information Technology, have performed much better,” notes Rosenbluth. “Yet, some smart-beta ETFs that provide an alternative weighting have relatively high exposure due to the value or dividend attributes of S&P 500 constituents.”

RSP's issue isn't its energy exposure; It's its value exposure. Value stocks account for about 41% of the fund's weight, which could restrain performance until investors embrace value plays again.

ProShares S&P 500 ex-Energy ETF (SPXE)

As its name implies, the ProShares S&P 500 ex-Energy ETF (NYSE: SPXE) excludes the energy sector and that's meaningful because it's outperforming traditional S&P 500 ETFs this year by about 160 basis points, a scenario that could be long-lasting.

“Energy has been the worst performing sector in the S&P 500 this year,” notes ProShares. “This year, through 4/21, Energy contributed -1.81% to the return of the S&P 500 and returned -45.11% for the period. Given recent trends like oil futures turning negative, the pain may not abate soon.”

Investors embracing SPXE face an obvious risk: if fossil fuel stocks stage a lengthy rally, this fund will lack rivals with that exposure.

Rosenbluth has positive implications ratings on RSP and RVRS. SPXE wasn't mentioned in his note.


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