The global bond market selloff has intensified dramatically over the past week, with the 10-year U.S. Treasury yield surging to 5.34%, its highest level since 2002, while the 30-year Treasury yield has climbed above 5.1%. This carnage sent shockwaves through rate-sensitive sectors, with U.S. homebuilders dropping sharply in a single session and utilities facing relentless pressure.
Amid this turmoil, the energy sector has emerged as a notable outlier. The State Street Energy Select Sector SPDR ETF XLE gained 1.1% even as broader markets stumbled over the past week, supported by Brent crude holding more than $100 on supply disruption fears. Now that the selloff appears to be cooling, with some traders betting on a rate top, the spotlight remains firmly on energy stocks and the exchange-traded funds (ETFs) that hold them.
Before identifying these funds, it is important to understand the connection between bond selloffs and the energy market, whether this cooling trend will affect the sector, and how ETFs come into play.
Connection Between Bond Selloffs and Energy Market Booms
Rising bond yields and soaring energy prices have fed into each other throughout this cycle. Higher oil prices stoke inflation expectations, pushing bond yields higher, while elevated yields pressure rate-sensitive sectors but often leave energy stocks relatively unscathed because their earnings are driven by commodity prices rather than borrowing costs.
The data supports this divergence. As the bond sell-off went on in early mid-September, XLE climbed toward its 52-week high of $66.17, with refiners leading gains. Meanwhile, Vanguard Energy ETF VDE, which holds prominent energy giants like ExxonMobil XOM and Chevron CVX, delivered a 38% year-to-date return as of late September. On the contrary, the S&P500 Index gained only 11.8% as of late September.
These performances underscore how energy's cash-flow-generating capacity becomes a relatively safe haven when fixed income sells off.
Is the Bond Selloff Cooling Off for Good?
The evidence for a probable bond sell-off cooling is mixed. On one hand, signs of exhaustion emerged on Thursday when the iShares 20+ Year Treasury Bond ETF TLT staged its best intraday rally in a month, and options flows in utilities suggested traders believed the sector was done falling. Weaker-than-expected U.S. jobs data reduced near-term rate hike odds, providing relief.
On the other hand, structural pressures persist. J.P. Morgan notes that central banks have only just begun hiking rates, and a geopolitical resolution in the Middle East — necessary to bring oil prices down to $70-$80 and ease inflation — remains uncertain. Even if yields retrace, the "higher-for-longer" narrative may persist.
For energy stocks, this means continued support: higher oil prices sustain earnings, while any yield stabilization could lift broader market sentiment without undermining the sector's fundamental drivers.
The Role of Energy ETFs
Against the current backdrop, Energy ETFs offer diversified exposure to this dynamic without single-stock risk. They span integrated energy giants, exploration and production companies, and refiners, allowing investors to capitalize on supply shocks and refining margins.
With many energy ETFs also offering dividend yields and low expense ratios, they serve as both tactical plays and income generators during periods of rate volatility.
Energy ETFs That Deserve a Spotlight Now
Considering the aforementioned discussion, the spotlight is currently on the following Energy ETFs that demand a place in your portfolios now:
State Street Energy Select Sector SPDR ETF XLE
This fund, with assets under management (AUM) worth $40.93 billion, provides exposure to companies in the oil, gas, and consumable fuel, energy equipment and services industries. XOM holds the first spot in this fund, with a 23.51% weight.
XLE has soared 42.6% year to date and charges 8 basis points (bps) in fees. It traded at a good volume of 27.82 million shares in the last trading session and sports a Zacks ETF Rank #1 (Strong Buy).
Vanguard Energy Index Fund ETF VDE
This fund, with net assets worth $12.7 billion, provides exposure to companies whose businesses are dominated by either of the following activities: the construction or provision of oil rigs, drilling equipment, and other energy-related service and equipment; or the exploration, production, marketing, refining, and/or transportation of oil and gas products. XOM holds the first spot in this fund, with a 21.82% weight.
VDE has surged 41.9% year to date and charges 9 bps in fees. It traded at a volume of 0.35 million shares in the last trading session and sports a Zacks ETF Rank #1.
VanEck Oil Services ETF OIH
This fund, with net assets worth $1.90 billion, includes U.S.-listed companies involved in oil services to the upstream oil sector, including oil equipment, oil services or oil drilling. Schlumberger Nv holds the first spot in this fund, with a 19.16% weight.
OIH has rallied 37.5% year to date and charges 35 bps in fees. It traded at a volume of 0.21 million shares in the last trading session and carries a Zacks ETF Rank #2 (Buy).
First Trust NASDAQ Oil & Gas ETF FTXN
This fund, with net assets worth $1.09 billion, provides exposure to U.S. oil and gas companies. Marathon Petroleum Corporation holds the first spot in this fund, with an 8.01% weight.
FTXN has gained 42.5% year to date and charges 60 bps in fees. It traded at a volume of 0.17 million shares in the last trading session and carries a Zacks ETF Rank #2.
Boost Your Portfolio with Our Top ETF Insights
Zacks' exclusive Fund Newsletter delivers actionable information, top news and analysis, as well as top-performing ETFs, straight to your inbox every week.
Don’t miss out on this valuable resource. It’s free!
Get it now >>Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
iShares 20+ Year Treasury Bond ETF (TLT): ETF Research Reports
ExxonMobil Holdings Corporation (XOM): Free Stock Analysis Report
State Street Energy Select Sector SPDR ETF (XLE): ETF Research Reports
Vanguard Energy Index Fund ETF Shares (VDE): ETF Research Reports
VanEck Oil Services ETF (OIH): ETF Research Reports
First Trust NASDAQ Oil & Gas ETF (FTXN): ETF Research Reports
Chevron Corporation (CVX): Free Stock Analysis Report
This article originally published on Zacks Investment Research (zacks.com).