There are 11 different stock market sectors, and Vanguard has an exchange-traded fund (ETF) for each one. Over the last month, the S&P 500 index is up over 5%, along with every Vanguard sector fund except for the Vanguard Energy ETF (VDE 0.02%).
Here's what's driving the fund down and whether it's worth buying now.
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Energy has been left out of the market rally over the last month
The Vanguard Energy ETF mirrors the performance of the energy sector, which tracks the top U.S.-based oil and gas companies.
The fund doesn't represent the global energy sector, leaving out key international players and national oil companies. The following chart shows that the fund is down around 5% in the past month.
The Vanguard Energy ETF is impacted by oil and gas prices, as well as U.S. production, energy policy, regulations, tax credits, and other factors. While large U.S. producers like ExxonMobil (XOM -0.01%), Chevron (CVX 0.01%), and ConocoPhillips (COP 0.03%) have sizable international portfolios, they still depend heavily on U.S. production, particularly onshore shale plays.
Energy sector headwinds
West Texas Intermediate (WTI) crude oil -- the U.S. benchmark -- just fell below $70 a barrel, marking the lowest point in 2024. As you can see in the chart, the Vanguard Energy ETF is closely correlated to oil prices.
Earlier this month, OPEC+ cut its forecast for oil demand, expecting a 2 million barrel-per-day (bpd) increase in 2024 and an additional 1.7 million bpd increase in 2025. Both estimates are down from August forecasts, indicating concerns for global economic growth.
There's also uncertainty regarding the U.S. presidential election. Energy policy is a hot-button issue for both candidates from the two leading parties. Although neither is necessarily anti-oil and gas, investors may prefer to wait and see how they approach the sector before buying ahead of this unknown.
Another factor is the threat of a recession or economic slowdown. The Federal Reserve has done a masterful job bringing down inflation without derailing the economy. However, it is about to begin the process of cutting interest rates, which could spur economic activity and lead to higher inflation. The Federal Reserve is attempting to give the economy a "soft landing" and avoid a recession, but how that will play out remains to be seen. A recession can lead to lower energy demand as economic output slows, which can also lead to lower oil and gas prices.
Finally, there's pressure to increase oil and gas output. Over the past year, many oil and gas companies have made sizable acquisitions to boost production and, in turn, free cash flow that can be used to accelerate growth, support buybacks, and grow dividends. The threat of higher supply is yet another factor that could weigh prices down.
Industry leaders can handle lower oil prices
Exxon, Chevron, and ConocoPhillips comprise 42.5% of the Vanguard Energy ETF. Given the concentration, it's worth digging deeper into how these companies are doing to get a sense of where the U.S. oil and gas industry and the Vanguard Energy ETF could be headed.
Exxon has finally begun to sell off after being one of the strongest performers in the sector. Despite the pullback, Exxon remains one of the best-positioned companies in the industry.
Exxon's acquisition of Pioneer Natural Resources has boosted its Permian Basin production and free cash flow without jeopardizing its balance sheet. However, the lower oil prices go, the lower Exxon's margins become. Lower oil prices impact Exxon's ability to reinvest in the business or support capital return programs like stock buybacks.
Like Exxon, Chevron operates across the oil and gas value chain, from exploration and production to pipelines, chemicals, and refining. It also has a growing low-carbon business -- so there are plenty of opportunities to put capital to work even if the Hess deal fails. Chevron has paid and raised its dividend for 37 consecutive years and has a rock-solid balance sheet. Like Exxon, Chevron can still rake in profits at current oil price levels thanks to its low cost of production.
In May, ConocoPhillips made a massive deal to buy Marathon Oil -- which boosted its domestic production. At the time, ConocoPhillips said it planned to increase its annual share buybacks to $7 billion. Lower oil prices would make it harder for ConocoPhillips to hit that aggressive buyback goal. But the company has a portfolio of low-cost assets that allows it to do well even at lower oil price levels. Like Exxon and Chevron, ConocoPhillips has a strong balance sheet with low leverage -- featuring a mere 0.138 financial debt-to-equity ratio.
COP Financial Debt to Equity (Quarterly) data by YCharts
The energy sector is chock-full of value
Although lower oil prices could lead to guidance cuts, the sell-off in many top oil and gas stocks has made the industry a great all-around value. What's more, the industry is packed with high-yield dividend stocks that can help fuel passive income-oriented portfolios.
With a mere 0.1% expense ratio, a minimum investment of just $1, and a 3% dividend yield, the Vanguard Energy ETF is a great way to dip your toes into the energy sector while achieving diversification.
