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A Hidden Stock Disaster Lurks In Many Portfolios (Maybe Yours?)

Don’t laugh at the poor souls who watched S&P 500 energy stocks crash 40% this year. You might be one of them — and not even know it.

If you chased dividends, as many S&P 500 investors have for years, you likely own more energy than you think. And, if you’re tilted to value-priced stocks, like many academics recommend, you’re also tilted to energy.

Energy stocks are more heavily owned, making up 10% or more of a number of broad stock ETFs focused on maximizing dividends or that target “cheap” stocks. Compare that with energy stocks’ small 3% weight in the S&P 500, following their epic crash this year.

“In high-dividend yielding ETFs, yes, energy is a double-digit percentage,” says Todd Rosenbluth, head of ETF and mutual fund research at CFRA.

The S&P 500 Energy Dumpster Fire

Oil prices are in free fall this year. The price of a barrel of oil trading on the Nymex is down more than 70% in 2020. Flights are grounded. And cars, trucks and buses are parked waiting for economies to reopen following coronavirus shutdowns.

Energy stocks are the poster child of S&P 500 pain this year. The Energy Select Sector SPDR ETF (XLE) is down nearly 40% through Tuesday. That makes it the worst-performer among the 11 S&P 500 sectors. It’s especially painful as the S&P 500 is only down 11% this year.


Interestingly, if you own an S&P 500 ETF — like Warren Buffett does — the hit from the energy implosion is now small. The S&P 500 weights sectors based on their members’ market value. With energy stocks collapsing, the sector’s 3% weight in SPY stock is down from 6.1% in 2017, CFRA says. Energy holds the smallest weighting in the S&P 500 after materials, which is only 2.4%.

Your Hidden S&P 500 Energy Exposure

If you’ve been chasing dividends in an income-starved world, you likely did it in part with high dividend ETFs. But this move likely tilted you to energy.

The iShares Core High Dividend ETF (HDV) holds nearly $6 billion in assets. No doubt, the ETF’s yield of more than 4% is a draw. That’s twice the S&P 500’s yield. But with that dividend, you’re getting a huge helping of energy stocks. More than 20% of the ETF is in energy stocks. And that’s why it’s still down nearly 17% this year.

In fact, a tenth of iShares Core High Dividend is in just one energy stock: Exxon Mobil (XOM). Exxon yields nearly 8%. The problem is the stock is down 35% — just this year.

Energy stocks also lurk in ETFs focused on “value” stocks. The Invesco S&P 500 Pure Value ETF (RPV) puts 13.4% of its portfolio in energy stocks. Additionally, many ETFs that tweak the market-value weighting of the S&P 500 are also more loaded up on energy.

For instance, the Invesco S&P 500 Equal Weight ETF owns all stocks in the index by the same amount. That lifts its exposure to the energy sector to 4.8%.


How To Banish Energy From Your Portfolio

Don’t expect oil prices to recover any time soon, says Edward Moya, senior market analyst at Oanda. “Oil trade will remain volatile, but any major relief rallies will likely be heavily sold into until the entire energy space starts delivering deeper production cuts,” he said.

So, how do you erase energy exposure if you don’t even want the 3% from the S&P 500? One method is the ProShares S&P 500 Ex-Energy ETF (SPXE), which owns all 500 stocks in the index except the 27 energy stocks. The ETF is only down 9% this year.

Another strategy is sticking with growth stocks, which are light on energy now. The iShares S&P 500 Growth ETF, for instance, holds just 0.9% of its portfolio in energy. And it owns the growth stocks that are working, hence it’s only down 5% this year. Find out how to locate top growth stocks with Leaderboard

And if you’re angling for income, focus on dividend growth, not high dividend yields. The ProShares S&P 500 Dividend Aristocrats ETF (NOBL) owns stocks with long records of hiking dividends. It’s only 2.8% weighted in energy.

Lastly, don’t go overboard. The ProShares Short Oil & Gas ETF (DDG) bets energy will fall. It’s up 35% this year. But oil likely won’t stay this low forever.

“If you really wanted to be aggressive there is a whole suite of inverse products you could use, but that would be enormously speculative,” said Dave Nadig, chief investment officer at ETF Flows.

Energy Exposure Varies Wildly Even In Broad ETFs

High dividends and value-focus often boost energy sector weight

Source: IBD,, S&P Global Market Intelligence