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Energy companies in the S&P 500 Index are still down for 2023, even after a two-month advance that has them leading the market this quarter. Investors have yanked nearly $11.5 billion this year from the roughly 80 US-listed exchange-traded products tracking the industry, more than all other sectors combined, data compiled by Bloomberg show. The Energy Select Sector SPDR Fund, which tracks the stocks in the S&P 500, has seen $3.7 billion in outflows.
The exodus is in contrast to the nearly $35 billion that poured into those exchange-traded products from 2020 until early 2022, when oil peaked after Russia’s invasion of Ukraine. Now crude is surging again, touching its highest level this year as the US economy proves resilient in the face of Federal Reserve interest-rate hikes. To Wall Street observers such as Todd Sohn at Strategas Securities, it all may signal that the worst of the pain has passed.
“You’re starting to see leadership from energy improve against the backdrop of outflows, but it’s very subtle,” Sohn, a managing director of ETF and technical strategy, said in an interview. “That’s not a signal by itself, but it lends to the idea that sentiment is improving. From that perspective, this is starting to become a contrarian play.”
Strategas isn’t alone in seeing a potential momentum shift for oil and gas stocks. In mid-May, energy stocks were the worst-performing sector of the S&P 500 this year, losing about 10%. But as of Tuesday’s close, the group is down just 0.7%, compared with the S&P 500’s 17% gain. Investors have been lured by energy companies’ cheap valuations as they aim to diversify beyond some of the big technology stocks that led this year’s stock-market surge.
“The Nasdaq, the Big Tech companies, were so overbought and the energy stocks were so oversold in the first half of the year,” James Hodgins, a managing direct and portfolio strategist at Stifel, said by phone. Energy has “more room to run” with oil prices climbing, he said.
The momentum is giving a boost to energy bulls, who have argued through the first-half selloff in the sector that it’s the cheapest corner of the S&P 500 while offering high cash flows.
“I’ve certainly had to do a lot of hand-holding,” said Eric Nuttall, a senior partner and portfolio manager at Ninepoint Partners, describing investor jitters around the sector in the first half. He said his funds had recently seen a tipping point to inflows into the Ninepoint Energy Fund, which is the largest oil and gas focused ETF in Canada with C$2 billion ($1.5 billion) in assets.
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