Global equity indexes have plunged over the past few weeks and the energy sector has been among the worst-performing segments of the market. The Dow Jones Industrial Average has declined by almost 14 percent during the trailing one-month period, but Vanguard Energy Index (NYSE: VDE), an exchange-traded fund (ETF), has fallen by more than 17 percent. That underperformance from the energy sector is even more dramatic over three- and six-month periods.

That’s an excellent indication that the markets are betting on a significant economic slowdown and a sharp reduction in energy demand in the coming months. But I don’t share that outlook.

According to data released today by the US Department of Energy, US crude inventories fell by 5.2 million barrels last week and have been steadily dwindling. Gasoline supplies also fell sharply, even as analysts had predicted that inventories would remain relatively flat as producers and refiners ramp up operations.

There has also been concern over Chinese oil demand as the nation’s policymakers have sought to tamp down inflation by slowing economic growth. That prompted the International Energy Agency (IEA) to cut its forecast for Chinese oil demand in 2011 and 2012.

Despite those worries, Chinese oil imports rose 6.3 percent in the first seven months of the year. The country’s full-year oil demand is expected to average 9.62 million barrels per day, up by 55,000 barrels compared to last year. Additionally, Chinese oil demand is expected to grow to 10.13 million barrels per day next year. Based on Chinese production figures, the nation is importing about 5 million barrels of oil daily to meet its domestic demand, even as oil demand from emerging markets such as India and Brazil continues to rise.

Globally, the IEA expects that oil demand will average 89.5 million barrels a day this year and 91.1 million barrels a day in 2012. Those forecasts have been reduced due to weaker assumptions of global economic growth. But it’s important to keep in mind that the Energy Information Agency puts global production at only about 75 million barrels per day.

That’s a significant supply gap. Furthermore, supplies would come under additional pressure if another global recession fails to materialize. In one sign of looming supply troubles, industry analysts say that global auto sales have grown by 5 percent already this year.  

With US crude futures currently trading at about $80 per barrel despite growing demand, the energy sector looks pretty attractive, so long as the economy doesn’t slip into recession.  

Vanguard Energy Index is an excellent way to add inexpensive energy exposure to your holdings and the ETF offers significant upside potential if the economy does regain steam.

The fund’s portfolio skews towards integrated oil and gas outfits such as Exxon Mobile (NYSE: XOM) and Chevron (NYSE: CVX); these types of investments account for 47.6 percent of the ETF’s investable assets. Both companies have recently reported earnings that strongly outpaced analysts’ estimates thanks to stronger prices and margins. Both energy giants also benefited from extensive natural gas operations, a resource experiencing rapid demand growth.

Vanguard Energy Index also boasts extensive exposure to equipment and services outfits as well as exploration and production firms. These corners of the market will benefit from an inexorable trend in the energy industry: new oil reserve discoveries are increasingly found in the deep ocean and other hard-to-access areas.

With broad exposure to the energy sector and an expense ratio of just 0.24 percent, Vanguard Energy Index is the best energy-focused ETF for investors who believe the economy won’t relapse into recession.

What’s New

Emerging Global Advisors launched EGShares Emerging Markets High Income/Low Beta (NYSE: HILO) last week. A yield-weighted fund, it passively tracks a 30-stock index designed to include emerging market names that pay the highest yields while exhibiting the lowest betas. This strategy is intended to reduce volatility. In order to be included in the index, a stock must have adequate liquidity, a three-year track record of paying cash dividends and a yield of less than 10 percent.  

The fund’s 0.85 percent expense ratio isn’t particularly cheap. But the ETF has appealing attributes. Its portfolio includes extremely high-quality names and an attractive yield while providing diversification from the US dollar.

Rydex continued to build out its equally-weighted index offerings with the launch of Rydex S&P SmallCap 600 Equal Weight ETF (NYSE: EWSM) and Rydex S&P MidCap 400 Equal Weight ETF (NYSE: EWMD).

The funds’ strategies are straightforward. The funds hold equal shares of each of their index’s component stocks, unlike capitalization-weighted indexes that inherently overweight overvalued names. Both funds carry an annual expense ratio of 0.40 percent, making them among the least expensive equally-weighted funds available.