The investment world is full of oases. There are plenty of opportunities which look too good to be true – and that’s because, by and large, they probably are.

So it might be a fruitful exercise to find some clarity where passively indexed ETFs are concerned, especially as US stocks hit record highs this month. 

Index ETFs (exchange traded funds) offer an alternative to individual stocks, with an ETF sponsor buying every stock in an index, including the less appealing ones. Profit growth has appeared strong in recent times, with research predicting that the S&P 500 companies, the stock market index maintained by S&P Dow Jones, will see a 6.5% lift in combined profits in Q2 2017. 

Despite appearing to place a halo on index ETFs such as the S&P 500 companies, the figures warrant a closer inspection, rather than meaning that a series of sectors or companies have performed better than average over the period. There seems to be one major catalyst – namely, the energy sector.

Taking figures from Mauldin Economics, also reported in Forbes, the breakdown per sector of this 6.5% profit growth, in ascending order, makes for some interesting reading:

Sector 2Q Estimated Earnings Growth

  • Consumer Discretionary -2.0%
  • Utilities -0.5%
  • Healthcare 0.5%
  • Industrials 0.9%
  • Telecom Services 1.3%
  • Consumer Staples 2.5%
  • Materials 4.4%
  • Real Estate 5.1%
  • S&P 500 Average 6.5%
  • Financials 6.9%
  • Technology 9.4%
  • Energy 401.3%

So as we can see, while energy contributes a massive 401.3% to the growth, two sectors are actually declining, and five of the sectors show a growth of less than 1.3%. So it is now easy to see how the energy sector could be skewing the perception of index ETFs.

What should this tell investors? That it would be very unlikely for energy to continue its current rate of growth, and as such the recent growth of index ETFs should be seen in its proper context.

According to the Monaco-based banker Gérard Cohen, this has not stopped investors piling into index ETFs, but they should not ignore the important influence of oil prices on the energy sector

Monaco’s Gérard Cohen said: “While money continues to flood into index ETFs, investors simply cannot expect this earning growth of the energy sector to continue at the present rate. On the contrary, oil prices look likely to dip, and that could suddenly make the energy sector a far more uncertain place to hold investments.”

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