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The bull market for energy stocks still has room to run, and there are cheap exchange traded funds on the market to help investors ride along, according to Bank of America. Energy underperformed the broader market in January, with the Energy Select Sector SPDR Fund (XLE) returning just 2.8%. February got off to an even worse start, with the fund falling nearly 2% on Wednesday. The underwhelming month followed a big year for energy stocks in 2022. The struggles could be due to energy prices, which have fallen sharply since their peak last summer, and to the broader reversal in stock market leadership in recent weeks. However, Jared Woodard, Bank of America investment and ETF strategist, said in a note to clients on Tuesday that investors shouldn’t move on from energy just yet and may in fact still be underexposed to the space after some cyclical funds actually saw investors pull out cash last year. “Despite stellar returns in 2022 (+65%), energy sector ETFs still saw -$1.6bn in outflows. We have a favorable view based on valuation, light positioning, and strong commodity & equity fundamentals,” the note said. Investors don’t need to get too exotic to take advantage of this setup, according to Woodard. Bank of America’s top picks for energy ETFs include the broad SPDR fund, the Vanguard Energy ETF (VDE) and the Invesco S & P 500 Equal Weight Energy ETF (RYE) . Woodard described these funds as “low-cost options that offer strong risk adjusted returns, above average price momentum, and above average exposure to BofA’s top stock and industry picks.” The Invesco equal-weighted fund is more expensive than the SPDR and Vanguard options, though it does offer more exposure to smaller stocks. Chevron and Exxon Mobil combined represent about 40% of the exposure for those cap-weighted funds. Woodard also initiated coverage for the FirstTrust Energy AlphaDEX Fund (FXN) , an active energy strategy built on a quantitative model. Woodard gave the fund the equivalent of a hold rating, in part because of its 0.64% expense ratio and exposure to certain stocks, but it scored the best of Bank of America’s coverage group in the Sortino Ratio, which is a measure of risk-adjusted return. — CNBC’s Michael Bloom contributed to this report.
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