Energy Sector

“Energy” is one of the ten sectors of the Global Industry Classification Standard (GICS). The energy sector consists of stocks that relate to producing or supplying energy. Companies in this sector include those involved with the production of electricity, the exploration and development of oil or gas reserves, oil and gas drilling, and/or integrated power firms.

“Energy” is one of the ten sectors of the Global Industry Classification Standard (GICS). The energy sector consists of stocks that relate to producing or supplying energy. Companies in this sector include those involved with the production of electricity, the exploration and development of oil or gas reserves, oil and gas drilling, and/or integrated power firms.

Performance in the energy sector depends heavily on the supply and demand for worldwide energy. When oil prices are high, energy-producing stocks perform well, and when they dip, the related stocks decline. More than most sectors, energy tends to be sensitive to political events, as these often have an effect on the price of oil.

Faster, Consistent Growth

Energy is always in demand, and demands for energy will only grow as more of the world industrializes and consumers use more electronic devices and energy consuming products. Valued at around $7 trillion globally, energy is the most valuable market segment in the world. The energy sector constitutes about 10 percent of the world’s annual gross domestic product.

According to the International Energy Agency, the demand for energy on a global scale will grow by more than 30 percent in the next 20 years. Emerging economies like China, India, and the Middle East will account for approximately two-thirds of that growth. To meet that demand, the world must invest approximately $37 trillion in production and supply infrastructure, with half of that required by oil and gas production alone. Financial experts predict approximately $17 trillion will be invested in research and development of alternative fuels.

On average, the energy sector outperforms the rest of a nation’s economy. In the United States, for instance, energy has outpaced the Dow Jones Industrial Average by over 220 percent.

Investing in the Energy Sector

There are a number of ways to invest in the energy sector. For example, one can invest in the stocks of energy producing companies or in the industries that support energy research, development, and the manufacture of energy producing equipment. This can be done either through investments in individual companies or by investing in funds focused, in whole or in part, on the energy sector.

A number of mutual funds and exchange-traded funds (ETFs) include energy as a major focus of their portfolios. Energy funds tend to show sizable returns but can be subject to some fluctuation in value due to socio-economic and political occurrences. As a result, more diversified funds often use these to provide a growth element with relatively moderate risk.

Individual investors often like the energy sector for both long and short-term investments. Some companies in this sector, such as public utilities, can provide very stable investment options in the form of both stocks and bonds. Others are more volatile and can create large gains over the short term, but can also lead to enormous losses if not properly managed. A financial adviser may be best able to counsel the individual investor on how to take advantage of the characteristics of the energy sector to maximize return while minimizing risk.