As global markets grapple with uncertainties, particularly in the commodity sectors, sectoral exchange traded funds (ETFs) emerge as a compelling investment choice.

Chintan Haria, Principal, Investment Strategy at ICICI Prudential AMC, sheds light on why investors should consider sectoral ETFs, especially in the oil, gas, and metal sectors.

Navigating commodity market volatility

The recent geopolitical tensions, including the ongoing Middle East conflict, have caused volatility in commodity prices.

While the direct impact on oil, gas, and metal prices has been moderate, disruptions in key transportation routes like the Red Sea have introduced price fluctuations.

Haria explains, “Although the risk of long-term higher prices remains low, short-term spikes are possible if the conflict escalates further.”

For investors, this volatility presents both risks and opportunities.

Sectoral ETFs, which focus on specific industries, offer a way to capitalise on these opportunities while managing risk.

Understanding sectoral ETFs

Sectoral ETFs are investment funds that track the performance of specific sectors of the economy, such as oil and gas, metals, or technology.

They aim to replicate the performance of a sectoral index, providing investors with concentrated exposure to that sector.

Haria points out that these ETFs offer several advantages:

Focused exposure: Sectoral ETFs, like the ICICI Prudential Nifty Oil & Gas ETF and ICICI Prudential Nifty Metal ETF, allow investors to target particular sectors.

“These ETFs offer concentrated exposure to the oil and gas sector, and the metals sector, respectively,” Haria says.

This focus enables investors to benefit from sector-specific growth trends.

Diversification within the sector: While providing sector-specific exposure, these ETFs also diversify investments across multiple companies within the sector. This diversification helps mitigate risks associated with individual stocks.

Cost efficiency: ETFs generally have lower management fees compared to actively-managed funds. This cost efficiency makes them an attractive option for long-term investors.

Sectoral trends and investment potential

The oil, gas, and metals sectors are poised for growth, driven by India’s economic ambitions and global market dynamics.

Haria highlights India’s goal of becoming a $5-trillion economy by 2025 and its robust economic fundamentals.

“With rising industrialisation and urbanisation, domestic energy consumption and demand for metals are set to increase significantly,” he explains.

Investors can leverage this growth through sectoral ETFs, which align with India’s economic trajectory and policy support for these sectors.

Government initiatives such as production-linked incentive (PLI) schemes and reduced import duties further support sectoral growth prospects.

Investment strategy: Why now?

Despite recent outperformance, the oil and gas and metals sectors remain undervalued compared to broader market indices. “These sectors are undervalued in terms of price-to-earnings (PE) and price-to-book (PB) ratios, making them a good value buy,” says Haria.

As global economies recover and demand for commodities rises, sectoral ETFs provide a direct way to benefit from these trends.

Commodities often act as a hedge against inflation. With rising prices in many sectors, investing in commodity-focused ETFs can help protect against inflationary pressures.

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