Old Energy Versus New Energy
It’s common knowledge that the energy sector has been in the dumpster for years. Yes, energy is the top-performing S&P 500 sector over the past 12 months, but the longer-term track record is dismal.
Over the past five years, the S&P 500 has returned 101%. Within the S&P 500, technology is up 239%, consumer discretionary is up 140%, and the financial sector is up 118%. The second-worst performing sector over the past five years is consumer ataples, up 49%.
But if you had all of your eggs in the Energy sector, you haven’t fared very well. The Energy Select Sector SPDR ETF (XLE), which represents the largest energy companies in the S&P 500, is down by 4% in five years. But the S&P Oil & Gas Exploration & Production SPDR ETF (XOP), representative of the smaller-cap drillers, is down by 32% over the same timeframe.
Incredibly, this marks a time of record oil and gas production for the U.S. oil industry. It covers a period of record global consumption of oil and natural gas. Why hasn’t that translated into returns for shareholders?
The COVID-19 pandemic bears part of the blame, but perhaps more importantly is the expectations of investors. Even as we consume record amounts of oil, many investors see oil companies as dinosaurs destined for extinction. That expectation translates into poor long-term gains for the sector. The past year is a bit of an anomaly, as it primarily reflects a bounce from the deep COVID-19 selloff. Most energy companies have yet to return to pre-COVID share prices.
However, it’s important to make a distinction here between the energy companies of old and the new breed of energy companies. We generally think of the energy industry as oil and gas companies. And trust me, those companies will be around for a long time.
But electric vehicles continue to penetrate the market. Consumers are trading in fossil fuel consumption for electricity consumption. And while most of our electricity is still produced with fossil fuels, a growing percentage is being produced with renewables.
Companies in the wind and solar sector are seen as the future, and their returns reflect those expectations. The Invesco Solar ETF (TAN) is an exchange-traded fund I recommended to investors in 2017. It is based on the MAC Global Solar Energy Index, and it has returned 293% in five years, better than any of the major S&P 500 sectors.
Solaredge Technologies (NSDQ: SEDG), a maker of solar inverters that I first recommended to investors in 2016, is up 1,681% in five years. Daqo New Energy (NYSE: DQ), a producer of silicon and polysilicon for solar panels that I recommended for our Radical Wealth Alliance publication, has returned 1,155% in five years.
The point I am making here is big returns for investors are still possible in the energy sector. But the opportunities have shifted from oil and gas to renewables, which look to be a better bet for the future. The fossil fuel industry still has plenty of life left, but investor expectations will continue to weigh down oil and gas and boost renewables.
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