Energy exchange traded funds (ETFs) give investors a simple way to invest in the total energy market of the country without searching through individual stocks. We’ve rounded up some of the best energy sector ETFs currently available to new investors, along with some additional information to know before you invest.
Quick Look: the Best Energy ETFs
- SPDR S&P Oil & Gas Exploration & Production ETF (XOP)
- Vanguard Energy ETF (VDE)
- iShares Global Clean Energy ETF (ICLN)
- Invesco DWA Energy Momentum Portfolio ETF (PXI)
- Energy Select Sector SPDR Fund (XLE)
- iShares U.S. Oil & Gas Exploration & Production ETF (IEO)
- What types of energy sources can you invest in?
- The Best Energy ETFs for This Year
- 1. SPDR S&P Oil & Gas Exploration & Production ETF (XOP)
- 2. Vanguard Energy ETF (VDE)
- 3. iShares Global Clean Energy ETF (ICLN)
- 4. Invesco DWA Energy Momentum Portfolio ETF (PXI)
- 5. Energy Select Sector SPDR Fund (XLE)
- 6. iShares U.S. Oil & Gas Exploration & Production ETF (IEO)
- Final thoughts
What types of energy sources can you invest in?
The United States uses and produces energy from a number of sources, including:
- Natural gas: About 30% of the energy that we use comes from natural gas, a mixture of methane, carbon dioxide, nitrogen, and other gases found deep below the surface of the Earth. After exposure to intense heat and pressure over millions of years, natural gas is often extracted as a liquid. Natural gas is a non-renewable resource, which means that once we use it all, we can’t create more.
- Coal: About 17.8% of the energy we use, coal is the second most popular energy source used in the United States. Coal is the world’s most abundant fossil fuel, with localized pockets found in countries like Russia, China and the Midwestern United States. Coal is a non-renewable resource.
- Renewable energy sources: In the last decade, a large amount of research has been devoted to documenting the negative effects that the burning of fossil fuels has had on the air quality and environment of the world. Renewable sources of energy: wind turbines, hydropower and solar energy now make up about 12.7% of the energy that we use.
- Nuclear energy: Nuclear energy is created when atoms are split apart inside a nuclear reactor. When an atom splits, a large amount of energy is released—nuclear reactors harness this energy to produce steam and turn a turbine. Contrary to popular belief, nuclear energy is safe and produces much less waste when compared to the burning of fossil fuels. Nuclear energy currently makes up about 10% of the energy consumed by the United States. Nuclear power relies on uranium, a non-renewable resource.
Some ETFs focus on a particular segment of the energy sector, while others attempt to create a comprehensive picture of the U.S. energy industry by balancing a few stocks from each source.
The Best Energy ETFs for This Year
1. SPDR S&P Oil & Gas Exploration & Production ETF (XOP)
If you’re interested in the production, refinement and continuation of the fossil fuel industry, consider investing in the SPDR S&P Oil & Gas Exploration & Production ETF, which tracks the S&P Oil & Gas Exploration & Production Select Industry Index.
As the fund’s name suggests, the SPDR S&P Oil & Gas Exploration & Production ETF invests solely within the oil and gas sector. Some of the fund’s top holdings are in the Cabot Oil & Gas Corporation, the Southwestern Energy Company, and the Murphy Oil Corporation.
With exposure across small-, mid-, and large-cap stocks and a relatively low expense ratio of 0.35%, the S&P Oil & Gas Exploration & Production ETF is a great first choice for novices who enter the energy sector for the first time, as natural gas and oil remain two of the U.S.’s most commonly-used sources of energy creation.
2. Vanguard Energy ETF (VDE)
The world’s most well-known provider of low-fee total market index funds, Vanguard also offers a number of industry-specific ETFs in a niche segment of the economy.
The Vanguard Energy ETF is a passively managed fund that invests in companies involved in the production, refining and sale of coal, natural gas and oil. As is the case with most of Vanguard’s ETFs, the fund offers a low expense ratio of 0.10%. The Vanguard Energy ETF is considered to be one of the most volatile funds offered by the investing giant, so include the ETF only as a small percentage of an otherwise highly-diversified portfolio.
Larger investors may consider investing in the Vanguard Energy Index Fund Admiral Shares, which has a $100,000 minimum investment in exchange for lower fees.
Vanguard Energy ETF performance
3. iShares Global Clean Energy ETF (ICLN)
Looking to move away from fossil fuel-based ETFs? The iShares Global Clean Energy ETF invests solely in renewable sources of energy, including companies that develop and harness power from solar, wind, and other sources of eco-friendly options.
Some of the fund’s largest holdings are in Vestas Wind Systems, Siemens Gamesa Renewable Energy and the Pattern Energy Group. Unlike other funds on this list, the iShares Global Clean Energy ETF holds securities based throughout the world, including countries like Brazil, Spain, Denmark and China. The fund also carries a lower-than-average expense ratio of 0.46%.
The iShares Global Clean Energy ETF is a reliable choice for investors with an international focus who also want to invest in sustainable sources of energy.
iShares Global Clean Energy ETF performance
4. Invesco DWA Energy Momentum Portfolio ETF (PXI)
The Invesco DWA Energy Momentum Portfolio ETF is an oil- and natural gas-based ETF that tracks the DWA Technical Leaders Index. Though over 90% of the fund’s holdings are centralized in companies that produce, refine, and distribute fossil fuels, the fund also invests a small number of assets in metals and mining equipment and energy processing corporations.
The fund’s top holdings are in Cheniere Energy, Concho Resources, and Phillips 66. No single asset included in the fund makes up over 5% of the total asset allocation, which makes the Invesco DWA Energy Momentum Portfolio ETF a more diversified option in the oil and gas sector.
An almost equal blend of large-, medium-, and small-cap stocks, the Invesco DWA Energy Momentum Portfolio ETF provides a more limited-risk option in the volatile energy sector.
5. Energy Select Sector SPDR Fund (XLE)
The Energy Select Sector SPDR Fund is another total market energy investment fund which aims to track the performance of the Energy Select Sector Index. This index is widely considered to be representative of the total energy sector of the S&P 500. The Energy Select Sector SPDR Fund is massive, with over $13 billion in managed assets.
Like the Vanguard Energy ETF, the fund mostly focuses on large-cap oil and natural gas stocks like Exxon, Chevron, and the Occidental Petroleum Corporation. The fund also holds a small number of assets in companies that focus on providing commercial and residential electricity and energy equipment.
The Energy Select Sector SPDR Fund has a low expense ratio of 0.13%. Comparable to the Vanguard Energy ETF and a low-cost option for entering the energy sector, the Energy Select Sector SPDR Fund is a large and popular choice for energy investors.
6. iShares U.S. Oil & Gas Exploration & Production ETF (IEO)
The iShares U.S. Oil & Gas Exploration & Production ETF tracks the U.S. Select Oil Exploration & Production Index. A smaller offering, the fund holds about $462 million in assets but does a considerable amount of movement during the day, with over 110,000 daily shares bought and sold on average.
The iShares U.S. Oil & Gas Exploration & Production ETF is a more expensive offering when compared to competitors with an expense ratio of 0.46%, but the fund also offers a move away from large holdings in Exxon and Chevron that characterize most other low-cost energy ETFs. This gives the iShares U.S. Oil & Gas Exploration & Production ETF a higher potential for growth balanced out with a moderate amount of risk.
The energy industry is considered to be one of the most volatile in the United States, and as a result, energy ETFs typically include a large amount of risk due to their non-diversified nature. Long-term investors are encouraged to supplement a well-diversified portfolio with only a few high-volatility shares of industry-specific ETFs.
Investing in a complimenting total market index fund alongside your tech ETF or mutual fund of choice can help you reap the benefits of the booming tech industry and also limit your risk in periods of negative movements.