Stock investors are poised to miss out on soaring oil prices with energy only making up 2% of portfolios, BofA says

• The energy sector has a low weighting in most long-only investment portfolios, according to Bank of America.
• Low exposure to energy will mean many investors will lose out on potential gains to be made as oil prices rise.
• The energy sector is up about 45% this year compared with the S&P 500's roughly 13% gain.

Oil prices are primed to push higher in the near term but many investors may miss out on building wealth from those moves because most portfolios have very low exposure to the energy sector, according to Bank of America.

Supply constraints and growing demand for oil as coronavirus vaccinations allow more people to return to work and travel are factors that will contribute to drawing up the commodity's value and build on price gains of at least 40% this year for both Brent crude and West Texas Intermediate crude.

The impact of the upside risk, however, may bypass numerous investors as the energy sector has 2% of an average long-only portfolio manager's weight. This "paltry" level is about half as much as the 4.2% exposure to tech-behemoth Facebook, said Savita Subramanian, head of US equity strategy and quantitative strategy at BofA Securities, in a note published Thursday.

"Not owning Energy wasn't painful when the sector was <2% of the S&P 500," she wrote. "But the astronomic 92% price return since October has bumped Energy's weight to 3%; another big move in oil may be felt more acutely."

The energy sector collapsed in 2020, losing nearly 40% as oil prices briefly dropped into negative territory in a market rocked by a plunge in demand due to the coronavirus pandemic. The sector, along with oil prices, managed to dig out of the red in part as OPEC and its allies cut production to address the buildup in oil stockpiles.

The energy sector this year has gained 45% compared with the S&P 500 index's nearly 13% rise to record highs. Brent crude and WTI prices over the past 12 months have run up by nearly 90% and 95%, respectively, leaving Brent to fetch more than $72 a barrel, and WTI to trade above $70 a barrel.

"If Energy doubled again, and all other sectors saw average returns, investors with no Energy exposure would sacrifice a full 3 percentage points of alpha," or returns above a compatible benchmark index, wrote Subramanian. Losing out on 3% would more than obliterate relative gains of 0.59% this year, she said.

Meanwhile, ESG funds centered on environmental, social, and governance issues such as clean energy stand to underperform even more given their 70% underweight in the sector, said the strategist.