Two ETFs That Mirror the Market’s Underperformance: A Critical Gauge of Market Trends

Energy ETFs Reflect Political Shifts, But Infrastructure and Nuclear Offer Resilience

New York, NY – October 23, 2025 – Energy exchange-traded funds (ETFs) are mirroring the cyclical swings of political administrations, wiht fossil fuels lagging and clean energy rebounding as leadership changes in Washington. However, a deeper look reveals that policy rhetoric doesn’t always translate directly into market performance, and the most durable opportunities are emerging in energy infrastructure and nuclear power.

The inverse relationship between the SPDR S&P Oil & Gas Exploration & Production ETF (XOP) and the iShares Global Clean Energy ETF (ICLN) has been strikingly consistent. During Donald Trump’s first term (2017-2021), XOP plummeted 57% while ICLN soared 279%. This trend reversed under President biden, with XOP climbing 107% and ICLN falling 63% following the passage of the Inflation Reduction Act (IRA). nine months into a potential second Trump term, the pattern has re-emerged: XOP is down 14% and ICLN is up 44%.

however, attributing performance solely to policy is an oversimplification. During Trump’s first term, the oil and gas sector was burdened by oversupply and the COVID-19 pandemic, while clean energy benefited from falling technology costs and increased corporate demand. Conversely, under Biden, fossil fuels gained from post-pandemic demand recovery and geopolitical events, while clean energy faced headwinds from rising interest rates and uncertainty surrounding the longevity of IRA incentives.

Beyond Commodities: The Rise of Infrastructure and nuclear

investors are increasingly shifting focus from volatile commodity exposure towards more stable sectors. Energy infrastructure is gaining traction, with the Utilities Select SPDR (XLU) attracting roughly $3 billion in inflows year-to-date, significantly outperforming the Energy Select Sector SPDR (XLE) which has seen $7 billion in outflows. This shift is driven by burgeoning electricity demand, especially from the rapid expansion of AI data centers, which could require up to 50 gigawatts of new power by 2027. Utilities and grid companies offer returns tied to regulated investments, shielding them from the price volatility and political uncertainty that plague exploration funds.

Nuclear power is also experiencing a resurgence. Executive actions are aimed at increasing U.S. nuclear capacity, and tech giants are investing in nuclear energy to power their data centers. The sector is being framed as crucial for national security and grid stability, reducing perceived project risk.

critical Risks Remain

Despite these emerging opportunities, investors face notable challenges. Regulatory whiplash – unpredictable policy changes – is a major concern, complicating long-term planning for renewable developers. Tariffs, shifting tax treatments, and permitting delays are creating instability, with some firms even reducing planned U.S. investment.

The future of the Inflation Reduction Act also looms large. A repeal or curtailment of its tax credits could significantly slow clean energy deployment, potentially impacting near-term earnings. however, this could also create selective entry points for investors who believe in the long-term trend towards electrification.

Investors seeking a more resilient approach should prioritize infrastructure and nuclear, recognizing that while political cycles will continue to influence energy markets, a diversified strategy focused on long

How does the underperformance of XLE reflect broader concerns about global economic demand?

Identifying Lagging Sectors Through ETF Analysis

In 2025, discerning investors are increasingly looking beyond headline market indices to understand underlying weaknesses.While the S&P 500 might show modest gains, a closer look reveals significant divergence. Two Exchange traded Funds (ETFs) currently exhibiting performance that mirrors broader market undercurrents – and signaling potential trouble spots – are the Energy Select Sector SPDR Fund (XLE) and the iShares Russell 2000 ETF (IWM). Analyzing these can provide valuable insights into the health of the overall economy and potential investment strategies.

The Energy Select Sector SPDR Fund (XLE): A Reflection of Demand Concerns

The XLE ETF tracks the energy sector of the S&P 500. Its recent underperformance isn’t necessarily indicative of problems within the energy companies themselves, but rather a broader signal about global economic demand.

* Declining Oil Prices: Despite geopolitical tensions, oil prices have remained surprisingly subdued throughout much of 2025. This suggests a weakening demand outlook, particularly from China and Europe.

* Shift to renewables: The continued, albeit gradual, transition towards renewable energy sources is impacting long-term growth expectations for conventional energy companies. while not an immediate crisis, this trend is factored into investor sentiment.

* Refining Margins: Lower refining margins, impacted by fluctuating crude oil prices and seasonal demand, are also contributing to the sector’s struggles.

* Key Holdings: understanding XLE’s top holdings – ExxonMobil, Chevron, ConocoPhillips – is crucial. Their individual performance heavily influences the ETF’s overall trajectory.

Practical Tip: Investors should monitor inventory levels of crude oil and refined products as a leading indicator of demand.The Energy Information Management (EIA) reports are a valuable resource.

iShares Russell 2000 ETF (IWM): Small-Cap Struggles and Economic Sensitivity

The IWM ETF focuses on small-cap companies within the Russell 2000 index. Small-cap stocks are frequently enough considered a barometer of domestic economic health. Their current underperformance is a worrying sign.

* Interest Rate Sensitivity: Small businesses are disproportionately affected by rising interest rates. Higher borrowing costs squeeze margins and hinder expansion plans. The federal Reserve’s tightening policy throughout 2024 and early 2025 has significantly impacted this sector.

* Recessionary Fears: Small-cap companies are more vulnerable to economic downturns than their larger counterparts. Increased recessionary fears are driving investors away from these riskier assets.

* Supply Chain Issues (Lingering Effects): While largely resolved, lingering effects of supply chain disruptions continue to impact small businesses, particularly those reliant on imported materials.

* Labor Market Challenges: Small businesses often struggle to compete with larger companies in attracting and retaining talent, leading to increased labor costs.

Case study: Regional Bank Impact: The regional banking concerns of 2023-2024 continue to cast a shadow over the small-cap space. Tighter lending standards from smaller banks are restricting credit availability for small businesses.

Comparing XLE and IWM: A Correlated Underperformance

The simultaneous underperformance of XLE and IWM isn’t coincidental. Thay represent two distinct but interconnected facets of economic weakness: weakening global demand (XLE) and domestic economic fragility (IWM).

* Correlation, Not Causation: Its significant to note that correlation doesn’t equal causation. However,the parallel trends suggest a shared underlying issue – a slowing global economy.

* Sector rotation Implications: This underperformance may signal a broader sector rotation, with investors shifting away from cyclical sectors like energy and small-caps towards more defensive positions.

* Yield Curve Inversion: The continued inversion of the yield curve (short-term Treasury yields exceeding long-term yields) further reinforces the concerns highlighted by these ETFs.

Benefits of Monitoring These ETFs

Actively monitoring XLE and IWM offers several benefits for investors:

* Early Warning System: They serve as an early warning system for potential market corrections or economic slowdowns.

* Portfolio Diversification: Understanding their performance can inform portfolio diversification strategies, potentially reducing overall risk.

* Tactical Asset Allocation: Investors can use this information to make tactical asset allocation decisions,shifting capital towards more promising sectors.

* Risk Management: Provides a clearer picture of market risks and allows for proactive risk management.

Real-World Example: October 2024 Market Dip

In October 2024, a significant market dip was preceded by a noticeable decline in both XLE and IWM. Investors who paid attention to these ETFs were able to reduce their exposure to riskier assets before the broader market correction.This highlights the predictive power of these indicators.

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