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Avoiding energy may prove ‘painful’ for stock pickers, says BofA

Investors shunning energy could wind up feeling the pinch of higher oil prices. 

“Not owning energy wasn’t painful” when the sector was less than 2% of the S&P 500 index
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+0.47%
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said Savita Subramanian, an equity and quantitative strategist at BofA Global Research, in a note Thursday. But surging oil prices in the economic reopening could change that. 

“Another big move in oil may be felt more acutely,” Subramanian said, estimating that an “astronomic 92% price return since October has bumped energy’s weight to 3%” of the S&P 500.

“If energy doubled again, and all other sectors saw average returns, investors with no energy exposure would sacrifice a full” 3 percentage points of market-beating returns, she estimated, adding that it would more than obliterate relative gains for active managers this year.

Meanwhile, portfolio managers who make long-only bets have twice as much exposure to tech giant Facebook Inc.
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+0.67%

than the entire energy sector, the report shows. Energy represents about a “paltry” 2% of the average long-only portfolio manager’s weight, half as much as the 4.2% exposure to Facebook.

Read: Oil edges higher, with U.S. prices back above $70 a barrel

Oil prices
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+0.27%

moved higher Thursday, with U.S. and global benchmarks trading above $70 a barrel. That’s a massive rebound from U.S. oil plummeting below $20 in the first half of 2020 when the COVID-19 crisis was wreaking havoc.

Shares of U.S. oil-and-gas companies have jumped, with the S&P 500 Energy index
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soaring around 45% this year in the economic rebound from pandemic-related shutdowns, according to FactSet data. The index had plunged about 37% last year.

BlackRock’s iShares Global Energy ETF
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an exchange-traded fund that tracks an index of global energy companies, was up 0.2% in afternoon trading Thursday. The move higher put returns for the year at about 34%.

The U.S. stock market has been trading near record highs, but gains are still far behind energy.

The S&P 500 and Dow Jones Industrial Average
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+0.06%

benchmarks are each up almost 13% this year based on Thursday afternoon trading, while the tech-laden Nasdaq Composite
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+0.78%

has climbed almost 9% in 2021. 

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