By Brett Arends
Subverting the conventional wisdom that the only stock exposure you need is in the broad indexes
For a century, energy stocks have tended to zig when the rest of the market zagged.
Having some of your 401(k) stock allocation invested in energy stocks in the past would have would have cushioned your portfolio during geopolitical crises such as the one currently threatening in Iran. And it would have done so at either little cost or even an overall profit, depending on the time period.
These simple facts subvert conventional financial wisdom, which says the only stock exposure you need is in the broad indexes. A MarketWatch analysis of 100 years of stock-market data confirms this (although, as we all know from the financial disclosures, past performance comes with no guarantee of future returns).
The point is a timely one. The major stock-market indexes tumbled this week in the U.S. and overseas while oil prices rose, amid growing signs that the U.S. government is preparing to launch a military strike, or strikes, against Iran.
So far this year, the SPDR State Street S&amp;P 500 ETF Trust SPY has barely broken even and the Invesco QQQ QQQ, which tracks the Nasdaq-100, is down. Meanwhile the State Street Energy Select Sector SPDR ETF XLE, a low-cost index fund that tracks the major U.S. energy companies, is up 22%.
It is no surprise that the latest crisis is boosting oil prices. Iran is one of the world's biggest oil producers, so markets worry that any military action could interrupt global supplies, at least in the short term. Iran also dominates the Strait of Hormuz, the lifeline through which the oil produced by other Gulf states, such as Saudi Arabia and Kuwait, reaches world markets.
The continued vital importance of oil to the global economy means that any threat to supplies is automatically bearish for most companies that aren't actually in the oil business. Higher oil prices raise the costs of manufacturing, transportation, heating and refrigeration, so when oil jumps, the rest of the market tends to fall.
That was the case when Russian President Vladimir Putin invaded Ukraine in 2022. The booming oil price in the 2000s, mostly driven by the surge in Chinese demand, coincided with a dismal decade for the S&amp;P 500, and the spike in fuel prices in early 2008 helped tip the economy into recession. And the infamous oil crises of the 1970s, caused by falling U.S. production and two OPEC embargoes, drove the U.S. economy into and out of recession and also coincided with a prolonged bear market for the rest of U.S. stocks.
Going much further back, oil prices also rocketed during the epochal crisis of World War II in the 1940s.
Details of stock-market performance by sector are available from the authoritative database compiled and maintained by Kenneth French, the legendary finance professor at Dartmouth College in Hanover, N.H.
We used that data to construct a database comparing the monthly performance of the energy sector of the U.S. stock market against the performance of the rest of the market.
French's data go back to the start of July 1926, or almost exactly 100 years, which allows us to look at performance before the rise of modern index funds, let alone sector funds.
A few simple things emerge from the analysis.
First, since 1926 the U.S. energy sector overall has outperformed the rest of the stock market. The difference is small. But it means that an allocation to energy need not have lowered your long-term returns.
Second, it would have provided significant diversification. The energy sector's monthly returns had only a 74% correlation with the rest of the market, meaning that sometimes it zigged when everything else was zagging - an extraordinarily useful attribute in the real world.
This was especially true during some of the worst periods for the overall stock market. For instance, during the lead-up to World War II and through its aftermath - looking at the 10 years following the Munich crisis of September 1938 - the overall U.S. market eked out lowly total returns of 35% when measured in real, constant dollars. The energy sector? Twice that, or 70%.
From 1969 through 1984, the S&amp;P 500 SPX earned you just 8% - yes, really - in total returns when measured in constant dollars. Energy stocks earned you 50%.
And from the start of this millennium through the end of 2012, when the S&amp;P 500 actually lost you money in real terms, energy stocks nearly quadrupled your investment, with a 275% gain in real, inflation-adjusted terms.
Oh, and in 2022, when Russia invaded Ukraine, the S&amp;P 500 lost 18%, or 23% when measured in constant dollars. The XLE energy-sector ETF, meanwhile, gained 64%, or 54% in real terms. No contest.
This is emphatically not about market timing. The argument is not that, with the benefit of hindsight, we should have bought energy stocks before international crises. (Nor is it that this is a particularly good moment to buy energy stocks, which have risen sharply lately. It's often better to buy these things when they are out of fashion, and cheap.)
The argument is that a constant allocation to energy stocks has added value over the long term, typically by outperforming just at those points when the rest of the stock market, and bonds, are often doing the worst.
For example, in 2022 (when the invasion of Ukraine and inflation coincided with a collapse in the bond bubble), a traditional portfolio of 60% U.S. stocks and 40% U.S. bonds lost about 17%. But someone who allocated 80% to such a portfolio, for example through the Vanguard Balanced Index Fund VBAIX, and 20% to energy stocks through XLE, broke even on the year. (Even just a 10% allocation to energy stocks would have effectively halved their losses.)
Such a portfolio would also have outperformed a traditional 60/40 portfolio so far this millennium (see below). It is up 5.5% so far this year, compared with 1% for the traditional 60/40 portfolio.
A 20% allocation to energy stocks would have raised your profits this millennium while smoothing returns.
This is not a specific recommendation of a 20% allocation to energy, either. (The traditional portfolio of 60% U.S. large-cap stocks and 40% U.S. bonds is also flawed, because it ignores the rest of the world, though that's a story for another day.)
We all know that past performance does not equate to future returns, even though most of Wall Street and the financial-planning industry act as if it does. There are no guarantees that energy will, in the future, provide a similar cushion as it has in the past. Renewable energy has destroyed the global monopoly of fossil fuels: Renewables now account for a big and growing share of global energy production. They are often the cheapest source of energy as well, a fact that is somewhat inconvenient for those who rail against green energy for driving up prices. Recent actions by the Trump administration to curtail green energy may delay the trend toward renewables, but they won't stop it.
That said, if renewables bring in an era of energy so cheap they quickly put the oil and gas giants out of business, tanking energy stocks, you would expect to see regular stock and bond funds boom from the enormous economic windfall. Which sort of helps prove the point that energy zigs when everything else zags. And it is yet another argument, in an uncertain world, to allocate some money to them.
-Brett Arends
This content was created by MarketWatch, which is operated by Dow Jones &amp; Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.
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02-20-26 1339ET

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The article discusses the benefits of including energy stocks in a 401(k) portfolio, especially during geopolitical crises like the current tensions with Iran. Historical data shows that energy stocks often perform well when broader markets decline, providing diversification and potential profit. For instance, while major indexes have struggled recently, the State Street Energy Select Sector SPDR ETF has risen 22%. The analysis highlights that energy stocks have outperformed the overall market over the past century, particularly during crises, making them a valuable addition to investment strategies.

Dow Jones

VanEck Oil Refiners ETF

VG Energy

Invesco Oil & Gas Services ETF

ISHRS S&P Glb Engy

VanEck Oil Services ETF

SPDR O&G Equip

SPDR Energy Select

iShares US Oil Equip & Svcs

SPDR O&G Ex & Prd

iShares US Oil & Gas Expl & Prod

Adding these stocks to your 401(k) could protect against crises like war with Iran