Energy companies are making up less of the S&P 500 Index /zigman2/quotes/210599714/realtime SPX +1.95% and investors in exchange-traded funds should keep a careful eye on what that means for their holdings, according to a research note out Tuesday.
At 4.4% — down from 5.3% as recently as the end of 2018 — energy is only the eighth-largest sector in the index, just above utilities and real estate, CFRA analyst Todd Rosenbluth wrote. That's a fraction of the share it’s held over the past decade or so. Even Exxon Mobil /zigman2/quotes/204455864/composite XOM +3.78% , which for years was one of the top 10 holdings in the massive SPDR S&P 500 fund /zigman2/quotes/209901640/composite SPY +1.84% , had fallen to the 12th-largest position by the end of August.
As always, that can mean very different things for different ETFs. Energy company representation in large, broad-based ETFs varies widely, CFRA points out: 6.5% in the iShares S&P 500 Value fund /zigman2/quotes/206097129/composite IVE +2.12% , but just 2.7% of iShares S&P 500 Growth /zigman2/quotes/208542267/composite IVW +1.64% — versus 11% of the Invesco S&P 500 Pure Value ETF /zigman2/quotes/202009318/composite RPV +2.68% .
That means the Pure Value fund bucks the trend in declining investor interest in energy. The sector is third, behind financials and consumer discretionary. The ETF tracks something called the S&P 500 Pure Value Index, which includes securities that have strong value characteristics, which it defines as “book value-to-price ratio, earnings-to-price ratio and sales-to-price ratio.”
Among its biggest holdings are Baker Hughes , making up nearly 2% of the fund, and Valero Energy Corp. /zigman2/quotes/200735463/composite VLO +3.48% , at 1.8%.
There are a few factors driving the decline in energy’s position in the S&P 500. Most importantly, the upswing in capital spending that accompanied the fracking revolution, running from about 2004 – 2014, has now reversed. CFRA believes that the lower capital spending will at some point “result in disappointing production, but that imbalance is not here yet.”
Investors seeking growth may be shunning energy companies since exploration and production companies “have a checkered history of delivering production growth,” in CFRA’s words. As MarketWatch has previously reported, the sector has been the worst-performing this year as trade tensions, global growth concerns, and the long slow consumer pivot away from fossil fuels weigh on energy companies.