Sector Bird’s Eye View: Energy & Environment
What is it?
The energy & environment Industry is made up of stocks relating to the production or supply of energy and energy-based products derived from raw materials and the environment. Products range from oil & gas drilling and refining to renewable energy and biofuels.
Why is it important?
These companies represent an important component of almost every person’s daily life, from providing their utilities to refining oil for the petrol that fuels their cars. Energy and environment companies represent roughly 5.48% of the benchmark S&P 500 index, and is expanding every year as rapid population growth pushes demand for energy higher over time. This sector is under constant change with companies restructuring their business strategies to align more closely with environmental standards as governments crack down on emissions, pollution, and non-sustainable energy sources.
- Exxon Mobil
- First Solar
- Edison International
- First Trust Clean Edge Green Energy
- Vanguard Energy
- iShares Global Energy
- iShares MSCI KLD400 Social
When does it do well/badly?
This sector is both cyclical and defensive, and tends to perform best during the winter months when consumers use more power to heat their homes. The companies involved also derive much of their performance from the prices of the underlying commodities they produce, which ties them to the commodity cycle. This means that they perform best when their raw materials have high spot prices and under-perform when commodity prices go through a lull. However, some utility companies, for example, are less cyclical and more defensive in nature, performing better in recessionary conditions as their products are necessities.
Why should I invest?
Because of its ties to the commodity cycle, investing in the energy sector can generate some excellent returns when paired with the right market conditions. It also represents a useful defensive aspect in times of weaker market conditions and uncertainty. Companies involved in oil production provide above average returns in response to short-term changes in global sentiment and supply. On the other hand, utilities companies offer more reliable longer term pay-off profiles at a lower risk premium, making them good choices for the sturdy foundations of your portfolio.