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ETF investment plays in the energy space

In this article:
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Cinthia Murphy, Managing Editor of ETF.com, joins Yahoo Finance to discuss investments in energy markets.

Video Transcript

ALEXIS CHRISTOFOROUS: I want to stick with energy now and bring in Cinthia Murphy. She is managing editor of ETF.com. It's part of our ETF report brought to you by Invesco QQQ. So Cinthia, we know that energy has been the best performing sector this year, quite a different story than what we saw last year during the throes of the pandemic. First off, are you seeing investors pushing their money into this sector in new and different ways here as we look ahead to 2022?

CINTHIA MURPHY: Hi, Alexis. Yes, we have. I mean, energy has been an underdog for so long. And if you look at all the S&P 500 sectors, since really 2008, that, you know, when this year we saw investors for the first time take a much closer look at your value cyclical rotation, energy played front and center in that. And it's been finding all sorts of assets coming into some of these funds, because it was devalue opportunity. It is, you know, the underdog that has much more upside potential than some of these more richly valued sectors that have been so popular in recent years. And so the money has been following a lot of the-- these types of funds.

Now in the ETF space, you know, the benchmark fund, if you will, for-- for the conversation on energy is XLE, which is a Sector SPDR, which is your S&P 500 energy stocks, which, if you think about energy as part of the S&P 500 before the financial crisis, it was, you know, double digits, 18%, maybe of this 500 today is under 3%. So it's-- it's a sector that really-- really had a lot of upside room potential relative to the other sectors because of such a long time of underperformance.

ALEXIS CHRISTOFOROUS: What about the volatility that goes along with investing in this space? Are you feeling that that's keeping some investors away? Because I would imagine volatility is going to stick around for the foreseeable future.

CINTHIA MURPHY: Absolutely. And I think in energy, the volatility has that-- that extra twist of just the idea of what's the future of energy, you know? Internally, we've been talking a lot about that in the sense that, you know, the future as we expect to be will be clean energy, not fossil fuels, but fossil fuels today is the way was to do business today. So you start to see like a lack of investment in your classic fossil fuel infrastructure, but we still depend on it heavily.

So you start to see shortfalls there, so it causes a volatility that's not really demand driven as much as more of an infrastructure issue is how is that all going to unfold as we switch to more clean energy as time goes on. And volatility has to be the name of the game in that context. Because it's-- it's a give and take that we're going to have to balance out as all industries, and businesses, and our technology really transitions into a clean energy.

ALEXIS CHRISTOFOROUS: You know, some industry analysts are saying that these soaring energy prices are just a stark reminder of just how dependent Europe, especially is, on fossil fuels. Are you seeing investors being choosy about where they're putting their money in the energy space? And is it geographic as well? Are there more opportunities that investors are taking advantage of in the USA versus Europe or elsewhere?

CINTHIA MURPHY: Yeah, we're-- we're seeing some-- some money go into energy small caps, for example, which something we haven't really seen in a long time. So it just compounding that whole value cyclical rotation play, energy small caps, it's talk about a risky spot that has been an interesting place, you know, funds like PSCE and even an [INAUDIBLE] fund because it's equal weighted. It tilts a little bit smaller. These are all funds that have been interesting plays this year.

Now in 2021 generally, across all sectors, really, but energy is included in that, we've seen investor demand for international exposure in a way we also have not seen in recent history. Of all the money that has come into ETF's in 2021, more than 26% have gone specifically into international equity place, which is much higher a percentage than any previous year in recent memory. So there's definitely an appetite. There's a look for that value opportunity outside of the US because things have run up so much over here. So there's a more welcoming appetite to global exposure for sure, energy included.

ALEXIS CHRISTOFOROUS: Cinthia, what's one headwind that you see perhaps derailing the rally we've been enjoying in energy as we head into the holidays and into winter?

CINTHIA MURPHY: I think, you know, winter is always a tough month for-- for energy costs from a consumer perspective. I mean, if you look at natural gas, you know, it gets colder. I-- I live in Chicago, so we expect those heaters to be running constantly. But, you know, I think it all is going to hinge on inflation. For the first time today, we saw, I think was the Atlanta Fed president, that started questioning this notion of transitory inflation. So there's a little bit of a cracking of this confidence that this is just transitory.

And I think inflation really can change the conversation on all of these sectors, but energy specifically, because there has been a perception that some of these prices-- gas prices have kind of peaked. But if inflation really picks up, it could, you know, starts to dent consumer confidence, it starts to hurt businesses, and eventually hurts demand. And none of that is good for the companies that operate in the segment. So I think keeping an eye on inflation what happens next would be key.

ALEXIS CHRISTOFOROUS: For sure. All right. Cinthia Murphy of ETF.com, thanks for being with us.