With inflation now hitting record highs, we think it could be wise to bet on energy ETFs because the energy sector usually fares well in an inflationary environment. Energy Select Sector SPDR Fund (XLE), Vanguard Energy ETF (NYSE:XLE) (VDE), SPDR S&P Oil & Gas Exploration & Production ETF (XOP), and iShares U.S. Energy ETF (IYE) are currently rated A (Strong Buy) in our proprietary rating system and could be smart additions to one’s portfolio now. So, let’s discuss.The stock market remains volatile, and consumer price data is indicating significantly higher-than-expected inflation. The Consumer Price Index rose 6.2% in October from a year earlier, its steepest annual climb in almost 31 years. Although equities, in general, perform poorly during inflation, specific sectors, including energy, tend to shine amid an inflationary environment.
The energy sector has beaten inflation 71% of the time and delivered an annual real return of 9% per year on average. This is primarily because energy-focused companies’ revenues are tied to energy prices, a key inflation component. Higher energy prices lead to higher revenues and profits for energy companies.
So, as energy prices continue to climb, we think it could be wise to invest in quality energy ETFs—Energy Select Sector SPDR Fund (XLE), Vanguard Energy ETF (VDE), SPDR S&P Oil & Gas Exploration & Production ETF (XOP), and iShares U.S. Energy ETF (IYE). These ETFs have an overall A (Strong Buy) rating in our proprietary POWR Ratings system.