Credit market commentary

Energy market commentary: June 2021

Strong performance has led to inflows into energy funds, both for traditional energy and renewables.

July 7, 2021 | 5 minute read

Data as of June 30, 2021, unless otherwise noted.

Performance (total returns)

BenchmarksJune 2021YTD
Alerian MLP Index (AMZX)5.18%47.84%
Alerian Midstream Energy Select Index (AMEIX)4.73%42.76%
ICE BofAML U.S. High Yield Energy Index (HY Energy)2.66%10.20%
S&P 500 Energy Index (S&P Energy)4.61%45.64%

Performance data quoted represents past performance and is no guarantee of future results. An investment cannot be made directly in an index.

Energy equities cap best-ever first half: Energy stocks capped their best-ever first half of a year as the robust global economic rebound boosted demand prospects as supply remained constrained. S&P Energy gained 4.61% in June, trailing only the tech sector for the month, and finished the first half of 2021 up 45.64%. The AMZX and AMEIX rose 5.18% and 4.73%, respectively, in June, and have each gained more than 40% since the start of the year. HY Energy bonds returned 2.66% for the month and have outpaced the broader high yield market by more than 600 bps YTD. WTI crude prices rose to a 2.5-year high $73.47/bbl and were within striking distance of a 7-year high at month-end. Markets continue to be very sensitive to OPEC+ production policy, which remains accommodative for oil prices as member countries weigh the fiscal benefits of higher prices against the risk of luring U.S. shale production back online.

Money is flowing into the energy sectorHalfway 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.
  • Strong performance has led to inflows into energy funds, both for traditional energy and renewables.

Index descriptions: Bloomberg Barclays U.S. Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS (agency fixed-rate and hybrid ARM pass-throughs), ABS and CMBS (agency and non-agency). ICE BofAML U.S. High Yield Master II Index is designed to track the performance of U.S. dollar-denominated below investment grade corporate debt publicly issued in the U.S. domestic market. S&P/LSTA Leveraged Loan Index is a market value-weighted index designed to measure the performance of the U.S. leveraged loan market.

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