It’s been a rough start to 2022, with growth stocks continuing to take a hit in what’s shaping up to be some sort of mini-dot-com bust or tech wreck. Indeed, the shift from growth to value and immense sector-based volatility could continue to persist through the rest of the year. High inflation, rate hikes, and COVID are other issues that investors are going to need to live with as well. It’s a risky time to be an investor. That said, the stock market will always have some form of risk associated with it. Arguably, when others are aware of such risks is when investors can feel better about getting into markets. Right now, rate hikes risks and COVID risks are loud and clear. Inflation is an issue, and others may begin piling into more inflation-resilient names like cheap dividend stocks.
Indeed, the trend is no friend of high-multiple growth stocks with nil in the way of earnings. No profits, extended multiples and uncertain long-term stories make for tumbling share prices. But that doesn’t mean 2022 will be a write-off year for the broader markets. Indeed, certain sectors have fared better than others. With tech rolling over in the last few quarters, energy and financials have flexed their muscles after fading into the background for most of 2020, a time when tech took off.
Indeed, I’d predicted that energy prices would bounce back very quickly in mid- to late 2020, a time when it was laughable to touch the beaten-down energy stocks with a barge pole. Now, investors are warming up to the energy trade, as it reeks of value. And unlike many speculative tech plays out there, they are producing incredible sums of free cash flow.
As tech tumbles, energy is blasting off
As tech tumbles, energy and financials, I believe, are a great place to diversify into, especially if you’re one of many young investors overweight in tech. Indeed, it can be tough to know where to look in markets you’re unfamiliar with. That’s why cheap ETFs may be the way to go. That way, investors can receive broader exposure and better diversification almost instantly! Of course, such ETFs will come with MERs. But for certain sector-based ETFs and funds, I’d argue that the sub-1% MER is well worth the price of admission.
Consider iShares S&P/TSX Capped Energy Index ETF (TSX:XEG), a great mix of oil and gas plays in Canada, ranging from large integrated firms to mid-level producers and everything in between.
The XEG is an incredible ETF that’s really had a remarkable run in 2021, soaring nearly 80%. Indeed, the diversified basket of Canadian energy names is red hot, with much momentum in the rear-view mirror. With oil prices flirting (and briefly surpassing) the US$80 mark, all eyes are on that US$100, which could be the next stop. Such a level will be the tide that lifts all fossil fuel names and the broader XEG.
Despite the momentum, many of the XEG constituents are still remarkably cheap. And they could get even cheaper, as they go up in price, given the magnitude of earnings growth that could be on the horizon amid improving industry conditions. Yes, it’s easy to shy away from the energy patch, especially after nearly doubling in just over a year.
With the perfect blend of value and momentum, though, I think energy-lacking investors should look to get some skin in the game, not just to benefit from continued upside in the oil patch, but to improve upon one’s diversification. The XEG provides exposure to Canada’s top producers and integrated plays. Undoubtedly, the ETF is bound to surge hand in hand with the price of oil.