Data as of July 31, 2021, unless otherwise noted.
Performance (total returns)
| Benchmarks | July 2021 | YTD |
| Alerian MLP Index (AMZX) | -6.31% | 38.51% |
| Alerian Midstream Energy Select Index (AMEIX) | -3.69% | 37.49% |
| ICE BofAML U.S. High Yield Energy Index (HY Energy) | -0.17% | 10.02% |
| S&P 500 Energy Index (S&P Energy) | -8.27% | 33.60% |
Performance data quoted represents past performance and is no guarantee of future results. An investment cannot be made directly in an index.
Energy decline after record first half: Energy stocks retreated following their best-ever first half as the spread of the delta variant brought demand concerns back to the fore. S&P Energy declined -8.27% in July, its worst month since September 2020, although energy remains the top-performing sector in the S&P 500 YTD. The AMZX and AMEIX fell -6.31% and -3.69%, respectively, in July, as midstream continues to take its cue from the broader energy sector in 2021. HY Energy bonds were essentially flat on the month, as the income return mitigated a modest widening in spreads. WTI crude prices closed at a new 3-year high of $73.95/bbl and rose above $75/bbl intramonth for the first time since 2018. The market was whipsawed mid-month as a rift developed within OPEC+ around the pace of production increases. In the end, the issue was resolved and OPEC+ still plans to return trimmed supply to the market at a gradual pace. For now, the largest risk for the oil market appears to be rising COVID cases across many parts of the world.
Money is flowing into the energy sector: Halfway through 2021, flows into U.S. energy funds suggest the sector is receiving a level of attention from investors that it has not seen in at least a decade. According to Morningstar, mutual funds and ETFs focused on the U.S. energy sector took in $12.6 billion of net inflows from December 2020 through May 2021, the highest 6-month total over the last 10 years. Certainly, the strong returns of the energy sector—including a 45.64% YTD return, far and away the top sector in the S&P 500—are a major factor in luring investors. However, there are other factors at play. With inflation seen as a key risk for markets, energy stocks can act as a sort of hedge via their exposure to commodity prices. The strong performance of energy stocks has also shone a bright light on the reality that many investors are severely under-allocated to the sector compared to history. Years of poor performance has taken energy’s weighting in the S&P 500 from over 12% a decade ago to less than 3% today, and thus investors in passive index funds hold very little exposure to energy names. Interestingly, it has not been solely funds focused on oil and gas companies that have attracted capital this year. While they have seen the majority of inflows, the three largest U.S. clean energy-focused ETFs have taken in $5.6 billion so far in 2021, roughly equaling the amount flowing into the largest S&P Energy-tracking ETF. It has been years since sentiment in the energy sector has been this positive, and investors clearly want exposure to both traditional fossil fuel companies and renewables.
Key takeaways
- The first half of 2021 was the best-ever for energy equities.
- Capital discipline today could set up energy producers for solid cash flow in the future.
