Oil's Surprising Impact On Sectors, ETFs

Oil's price action can have predictable influences among some exchange-traded funds. For example, it is arguably of little value at this point to tell investors that Canada and Russia ETFs are highly sensitive to oil prices. Likewise, the argument in favor of consumer stocks and ETFs in a low oil price environment.

The Impact Of Oil

After all, it is not a coincidence that when oil tumbled last year, the Consumer Discretionary SPDR (ETF) XLY gained about 10 percent while the S&P 500 gained barely more than 1 percent. However, recent data confirm the notion that there is more to the oil story among U.S. sectors, and that story is not limited to energy and consumer stocks.

Data from S&P Dow Jones Indices indicate that as oil prices rise, all 10 S&P 500 sectors join the party with telecom being the exception. S&P notes that for every 1 percent oil prices rise, the telecom sector, the smallest sector in the S&P 500, loses two basis points.

Related Link: 17 Countries Are Now Buying Oil From The United States: Here Is What You Need To Know

Interestingly, technology is the best-performing sector, after obvious candidates, energy and materials, when oil prices climb. Technology, the S&P 500's largest sector allocation, has an oil upside capture ratio of 21.4, according to S&P data. That is not far behind the ratio of 22.2 for the materials sector.

The Interconnection Of Oil, Other Sectors

“Putting aside energy and materials that clearly rise from an oil increase, technology gains most from an oil increase, rising on average nearly 22 basis points for every 1 percent gain in oil. Energy companies have increased efficiency tremendously over the past few years by investing in new technology, so as oil rises, it makes sense that energy boosts the tech sector. However, while investors are still willing to take some risk in the upside of the tech sector right now, the pessimism in tech (rapidly declining risk premium) has peaked this month the most of any sector, reflecting a shift away from the sector, despite the oil gain, and that is a warning signal,” according to a note by S&P Dow Jones Indices Global Head of Commodities Jodie Gunzberg.

Although oil prices are up year-to-date, the lack of an interest rate hike by the Federal Reserve is boosting rate-sensitive telecom stocks as highlighted by a gain of 13.7 percent by the Vanguard Telecommunication Services ETF VOX. That is nearly 300 basis points better than the returns offered by the Technology SPDR (ETF) XLK, which also holds some telecom names.

“Telecom may suffer with rising oil prices since gasoline and automobile demand may decrease that slows integration of connectivity in cars. It also may slow growth in digital technologies that make it easier to access and pay for public services using mobile devices, such as parking and transportation,” added Gunzberg.

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