The energy industry has been a favorite for many investors for decades, with constant demand for oil, natural gas, and other energy products across the globe helping to give companies incentives to find new resources. The most successful energy investors have been able to anticipate new trends before they happen, including the recent push into shale plays that has brought brand new regions of the U.S. into the forefront of the energy business.
If you want to invest in energy, there are many different ways you can do so. Exchange-traded funds (ETFs) give you quick access to several of the best ways to invest in energy, and the five ETFs below are among the most popular for investors looking to profit from the industry's success.
|
Energy ETF |
Assets Under Management |
Expense Ratio |
1-Year Return |
|---|---|---|---|
|
Energy Select Sector SPDR (XLE 0.36%) |
$18.5 billion |
0.13% |
13% |
|
Alerian MLP ETF (AMLP 0.28%) |
$9.37 billion |
0.85% |
(13%) |
|
Vanguard Energy (VDE 0.36%) |
$4.21 billion |
0.10% |
12% |
|
SPDR S&P Oil & Gas Exploration & Production (XOP 0.61%) |
$2.60 billion |
0.35% |
12% |
|
United States Oil Fund (USO 1.56%) |
$1.91 billion |
0.77% |
34% |
Data source: Fund providers, ETFdb.com.
Buying the whole industry
For some investors, the ideal energy investment has the broadest possible reach across the sector. For them, the Energy Select SPDR and the Vanguard Energy ETF are natural choices.
The SPDR ETF is the largest energy ETF by far, with more than 30 holdings that include major oil giants, as well as niche players in the exploration, production, transmission, refining, and marketing industry groups within the sector. Some would take exception to the fact that the market-cap-weighted ETF has 40% of its assets in just a pair of stocks: integrated oil majors ExxonMobil and Chevron. Yet you'll also find a wider range of companies within the ETF, giving more complete coverage at a reasonable expense ratio.
Image source: Getty Images.
The Vanguard ETF takes a similar approach, but it's somewhat more diversified, with more than 140 different names within the fund. Exxon and Chevron still represent 35% of assets, but as you look down the list, you'll see a greater number of holdings of small independent exploration and production companies, as well as minor players in other niche areas. Rock-bottom expenses are typical for Vanguard, although the shares aren't quite as liquid in trading as its SPDR counterpart.
Looking for smaller niches
To avoid having so much money go into the biggest U.S. energy companies, some ETF investors prefer more focused stocks. The Alerian MLP fund is designed to concentrate solely on master limited partnerships, which tend to have high income because of their structure and focus largely on pipelines and other energy infrastructure plays.
That sector has been weak despite the rise in oil prices over the past year, in part because of some high-profile distribution cuts, as well as some unfavorable outcomes from tax reform. Yet over the long run, most see continued value in building out the nation's energy transmission infrastructure, which could lead to a rebound of the nearly 30 MLPs whose units the Alerian MLP ETF holds.
Elsewhere, the SPDR E&P ETF concentrates on exploration and production companies. The fund uses a modified equal-weight system in allocating assets to its 70 stocks, with no single company currently having more than 2.25% of assets. You'll find Exxon and Chevron within the portfolio, but you also will see a host of smaller E&P players with much stronger growth potential. Returns haven't been much different from broader-based energy ETFs lately, but during boom times, you can expect greater upside from the way this portfolio is structured.
Finally, for those who want to invest directly in energy, the United States Oil Fund offers an ETF vehicle into the crude oil futures market. U.S. Oil holds futures contracts that move up and down with the price of crude. That avoids the operational risks involved with investing in oil-related businesses, but it comes at the cost of a gradual loss of value tied to the oil futures markets' usual relationship of contracts with different expirations.
Which energy ETF is right for you?
If you think prospects for the overall energy industry are good and expect all boats to rise as a result, then a broad-based ETF like the SPDR or Vanguard entries are a good starting point. However, those who want to focus on narrower niches as having greater potential can take their pick from the other ETFs listed here or others that have different focus areas. Either way, with oil on the rise, many see a lot of potential for energy investments in 2018 and beyond.
