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3 Top Energy ETFs to Buy for 2020

By Dan Caplinger - Jan 17, 2020 at 8:02AM

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If you're expecting a rebound in the oil patch, here are some ways to play it.

Energy has been a tough place for investors in recent years, as the prices of crude oil and natural gas have remained extremely low for a long time. Despite some potentially bullish signs, including rising tension in the Middle East, energy stocks have had a tough time holding their own, let alone keeping up with the big gains in the rest of the market.

Yet some investors believe that 2020 might be the year that energy starts to take off. If that's the case, then you'll want to know which investments are most likely to take advantage of more favorable conditions in the sector. The following three exchange-traded funds (ETFs) take different angles on the energy industry, but they all stand to benefit from higher prices.

Energy ETF

Assets Under Management

Expense Ratio

1-Year Return

Energy Select Sector SPDR (XLE -3.97%)

$11.4 billion

0.13%

(4%)

Alerian MLP ETF (AMLP -2.66%)

$8.03 billion

0.85%

(7%)

United States Oil Fund (USO -8.44%)

$1.39 billion

0.84%

14%

Data sources: Fund providers and ETFdb.com.

Having it all in energy

Some ETF investors like being able to own small pieces of a vast number of different investments that encompass an entire sector. For those investors, Energy Select Sector SPDR is a logical choice due to its broad-based diversification among energy stocks and low costs.

The Energy SPDR has more assets under management than any other energy sector ETF, and its portfolio of energy stocks spans the entire industry. It divides its assets across 28 different countries, with exposure to major integrated oil companies, exploration and production specialists, oil-field services and equipment providers, energy infrastructure and transportation companies, and downstream refining and marketing players.

Drill site with pipe nearby.

Image source: Getty Images.

One criticism of the Energy SPDR is that its market-cap-weighting method makes ExxonMobil and Chevron the two most influential stocks in the portfolio, with more than 40% of assets allocated to just those two companies. Yet if the energy sector rebounds, it's likely to lift Exxon and Chevron along with the rest, and that makes the Energy SPDR a reasonable way to bet on a turnaround in oil and gas.

Getting more income from energy plays

If you don't just want exposure to the biggest energy stocks in the market, then another avenue to follow is a closer look at master limited partnerships. MLPs primarily operate in the energy pipeline and infrastructure space, as the requirements for their favorable tax status force them to concentrate on certain areas of the energy sector. Over the past year, dividends from Alerian MLP have produced a yield of 9%, reflecting both the weakness in the sector and the relatively high payouts that energy-related MLPs make.

The ETF has most of its assets in pipeline transportation companies that move oil and natural gas from production areas to where they can be refined and transported to their final markets. However, about 30% of the portfolio is in stocks in the gathering and processing arena, as well as in companies related to liquefaction. If prices rise, production should follow, and that will boost the fortunes of companies whose job it is to move those products to market.

Looking at oil futures

The downside of most energy stocks is that they're only an indirect play on crude oil prices. For those preferring a more direct connection, the United States Oil Fund is worth a closer look.

The U.S. Oil Fund's portfolio holds positions in crude oil futures, with the intent of following the price of oil up and down. Because of the fact that futures markets are putting higher prices on currently available crude than on oil for future delivery, the ETF benefits from a gradual upward bias at the moment. That can reverse itself, but the main benefit for investors is the direct tie to crude prices that these futures contracts offer.

Take a closer look

After having been sluggish for years, the energy industry has some investors looking for a sharp rebound in 2020. If that happens, then these three ETFs could be big winners in the coming year, and their different approaches let you tailor your selections to whichever themes you find most compelling for 2020.

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Stocks Mentioned

ALPS ETF Trust - Alerian MLP ETF Stock Quote
ALPS ETF Trust - Alerian MLP ETF
AMLP
$34.03 (-2.66%) $0.93
United States Oil Fund LP Stock Quote
United States Oil Fund LP
USO
$74.78 (-8.44%) $-6.89
The Select Sector SPDR Trust - The Energy Select Sector SPDR Fund Stock Quote
The Select Sector SPDR Trust - The Energy Select Sector SPDR Fund
XLE
$69.70 (-3.97%) $-2.88

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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