If you are interested in investing in the energy sector, traditionally dominated by oil and gas companies, consider purchasing an energy exchange-traded fund (ETF). Investing in an energy ETF provides a convenient way to gain exposure to a variety of companies within the industry, allowing you to participate in potential sector rallies. Additionally, an ETF offers diversification, reducing risks compared to investing in individual stocks.
Here are some of the top energy ETFs categorized by sub-sectors, with data accurate as of September 16, 2024.
What are the primary types of energy ETFs?
The energy sector is vast and can be categorized into sub-sectors based on the operations of the companies within it. This provides multiple investment opportunities within the energy industry, and an energy ETF can offer exposure to various sectors:
- Exploration and production – Companies in this sector focus on finding, developing, and producing crude oil.
- Refining – This sub-sector involves companies that transform crude oil into usable products like gasoline.
- MLP – Master Limited Partnerships (MLPs) are specialized legal structures typically associated with midstream companies, such as pipelines. MLPs often offer substantial dividends.
- Oil equipment and services – Companies in this category provide goods and services to explorers and pipeline companies.
- Crude oil – Investors can also opt for an ETF that tracks the daily movements of petroleum.
For those seeking exposure to other forms of energy, such as innovative green companies, there are ETFs focused on clean energy firms, including those in solar or wind energy. This variety of options allows investors to tailor their energy ETF investments to their preferences.
Investors looking for diversification across industries can explore some of the best index funds.
Best energy ETFs
1. Best exploration and production ETF
Energy Select Sector SPDR Fund (XLE)
This ETF aims to represent the energy sector of the Standard & Poor’s 500 index. It includes companies involved in exploration and production, such as ExxonMobil and Chevron, as well as firms with exposure to energy equipment and services.
- 5-year returns (annualized): 15.4 percent
- Expense ratio: 0.09 percent
- Dividend yield: 3.2 percent
2. Best MLP ETF
Global X MLP ETF (MLPA)
This fund tracks the Solactive MLP Infrastructure Index, which includes master limited partnerships. Energy MLPs primarily focus on transporting oil or gas via pipelines. Due to their legal structure, MLPs typically offer significant dividends.
- 5-year returns (annualized): 8.8 percent
- Expense ratio: 0.45 percent
- Dividend yield: 7.4 percent
3. Best oil equipment and services ETF
VanEck Oil Services ETF (OIH)
This ETF tracks an index of U.S.-listed companies specializing in providing oil services to explorers and producers, including oil equipment, services, and drilling.
- 5-year returns (annualized): 6.8 percent
- Expense ratio: 0.35 percent
- Dividend yield: 1.4 percent
4. Best crude oil ETF
United States Oil (USO)
This ETF seeks to track the daily price movements of light sweet crude delivered to Cushing, Oklahoma. However, it does not directly hold oil but instead utilizes futures to replicate oil price movements.
- 5-year returns (annualized): -4.1 percent
- Expense ratio: 0.7 percent
- Dividend yield: N/A
5. Best clean energy ETF
iShares Global Clean Energy ETF (ICLN)
This ETF tracks an index of global stocks in the clean energy sector, including those generating energy from solar, wind, and other renewable sources.
- 5-year returns (annualized): 6.7 percent
- Expense ratio: 0.41 percent
- Dividend yield: 1.5 percent
What to consider when selecting an ETF
When investing in ETFs, it is essential to evaluate certain aspects of each ETF to ensure you are making informed investment decisions. Here are three crucial factors to consider:
- The sub-sector – Different sub-sectors within the energy industry may react differently to market conditions. Understanding the types of companies you want to invest in is crucial.
- Investment track record – Assess the historical performance of the ETF. Has it outperformed or underperformed the industry during various market conditions? The track record can provide insights into the ETF’s potential performance.
- Expense ratio – Pay attention to the expense ratio, which indicates the annual cost of owning the fund as a percentage of your total investment. Lower expense ratios are generally preferred, as they can impact overall returns.
Keep in mind that larger ETFs typically have lower expense ratios due to the ability to spread costs across a larger asset base. Therefore, the largest funds often offer the most competitive expense ratios, making this a key consideration when choosing an ETF.
How to invest in oil and energy ETFs
While an ETF provides a straightforward way to invest in the oil sector, understanding the volatile nature of oil prices and industry dynamics is essential. Different sectors within the energy industry may perform differently, and it is crucial to align your investment strategy with your goals and risk tolerance.
The listed ETFs offer a liquid investment option in the energy sector, but the choice of investment strategy ultimately depends on your preferences. Some investors may focus on direct oil price speculation, while others prefer exploration and production companies that benefit from rising oil prices. Additionally, some investors may favor energy MLPs for their steady dividends, despite variations in business models.
Consider your reasons for investing in energy companies. Are you seeking to hedge other investments or expecting a return on investment from the energy ETF? Understanding your objectives can guide your selection of the most suitable ETF.
Final thoughts
Investors seeking exposure to the energy industry have a range of options to explore, each offering distinct returns and risks. It is crucial for investors to conduct thorough research and understand the potential outcomes of each ETF. While some investors may opt for diversified index funds, others may prefer actively managed ETFs to capitalize on market opportunities.
– This article was updated with contributions from Bankrate’s Rachel Christian.
Editorial Disclaimer: Investors are encouraged to conduct independent research on investment strategies before making decisions. Past performance of investment products does not guarantee future price appreciation.