The Energy Problem

Over the past eighteen months, energy stocks have taken over the market. Here is a chart of the performance of the Amex Oil Index vs. the S&P 500:

Not coincidentally, several social indexes have lagged the S&P 500 over this period. The broad-based social indexes typically hold 1-3% of their investments in energy stocks, far less than the 7% or so held by the S&P 500.

The oil sensitivity of the social indexes has not been a secret - Dan Dibartolomeo and I wrote about it in a Journal of Investing article in 1996. But in those days the energy sector was delivering indifferent performance, giving social indexes a performance boost.   Today that dynamic is working in reverse.

An analyst at Goldman Sachs has famously predicted that oil could reach $105 a barrel.  Performance-minded investors in social indexes should hope it doesn't.  But isn't that a little odd? From an environmental perspective, higher oil prices would probably be beneficial: expensive energy encourages conservation and the development of alternative fuels.

This is one instance where active investors may have an advantage over passive ones. An active manager can choose to manage this risk by buying more energy stocks - an unmanaged index can't.