Oil prices have rallied this year. West Texas Intermediate, the primary U.S. benchmark price, is up more than 10% to nearly $80 a barrel. Higher crude prices are driving up most energy stocks.
One of the easiest ways to cash in on the oil-fueled rally in energy stocks is to invest in an exchange-traded fund (ETF) focused on the sector. They provide relatively broad exposure to the sector, enabling investors to enjoy some oil-fueled gains.
Energy Select Sector SPDR Fund (XLE 1.40%), Vanguard Energy ETF (VDE 1.41%), and SPDR S&P Oil & Gas Exploration & Production ETF (XOP 1.32%) stand out to some Fool.com contributors as the top energy ETFs to buy this month for those seeking to cash in on higher crude oil prices this year. Here's why they like them.
This energy fund has you well-covered
Reuben Gregg Brewer (Energy Select Sector SPDR): There's one thing you can count on when it comes to oil prices, and that's volatility. Right now oil prices are generally rising, but soon enough the prices could be heading lower again. In other words, if you're trying to cash in on higher oil prices you should, at the same time, think about hedging your bet against the risk of falling prices. Energy Select Sector SPDR ETF is as close as you can get to doing both of those things at the same time.
Energy Select SPDR ETF basically owns the energy stocks in the S&P 500 index. For starters, that means the energy stocks in the ETF have been vetted to ensure that they're large and economically important entities. That removes more risky investments from the mix. And Energy Select SPDR ETF is, like the S&P 500, market-cap weighted. So the largest energy companies make up the largest share of the ETF. In this instance, that means ExxonMobil and Chevron account for around 40% of the ETF's assets.
Exxon and Chevron are globally diversified, integrated energy giants. They're among the safest energy stocks you can own. Normally, I prefer ETFs with more diversified portfolios, but in the case of energy, being overweight in these two industry giants is a huge benefit.
The other 60% of the portfolio provides exposure to energy stocks that are likely to be more volatile, allowing you to see higher stock gains when oil prices are moving upward. If that doesn't pan out, however, the ETF still has the foundational investment in Exxon and Chevron to fall back on it.
A solid fund to navigate the energy sector
Neha Chamaria (Vanguard Energy ETF): If you're seeking exposure to oil and gas stocks amid higher oil prices, the Vanguard Energy ETF is one of your best bets. It's a low-cost fund, and its top holdings include some of the largest oil and gas stocks in the U.S. In fact, nearly 87% of the fund's assets are in large-cap stocks.
ExxonMobil and Chevron are the fund's two biggest holdings, respectively accounting for about 22% and 13.5% of its assets as of May 1. ConocoPhillips comes third, making up just over 7% of the fund's assets. Other notable top holdings include Schlumberger, Marathon Petroleum, and EOG Resources. The Vanguard Energy ETF is heavily focused on oil and gas producers, making it a no-brainer bet in a high oil-price environment.
With 116 stocks in its portfolio, the Vanguard Energy ETF is also one of the most diversified energy ETFs. By comparison, the Energy Select Sector SPDR Fund, has only 25 stocks in its portfolio. The greater diversification can help investors in the fund mitigate risks.
On top of all that, the Vanguard Energy ETF gives you exposure to such a diversified group of top energy stocks for a low cost -- it has an expense ratio of only 0.10%. Also, since most of the top stocks in the fund's portfolio pay a dividend, the ETF currently yields 2.9%.
With the Vanguard Energy ETF, you get exposure to a basket of top oil and gas stocks and broad diversification -- all at a low cost and with a dividend, too. This makes it an ideal pick to ride an oil boom.
A less concentrated approach
Matt DiLallo (SPDR S&P Oil & Gas Exploration & Production ETF): The Energy Select Sector SPDR Fund and the Vanguard Energy ETF are great ways to gain exposure to the energy sector. However, they have one drawback. They're a bit top-heavy.
As my colleague Reuben Gregg Brewer pointed out above, Exxon and Chevron comprise about 40% of the Energy Select Sector SPDR Fund. Likewise, as Neha Chamaria notes, those two energy giants make up over 35% of the Vanguard Energy ETF. While outsized exposure to those big oil giants helps mute some risks, it adds others, including the fact that underperformance by one of the leaders could cause a lag in overall performance of the fund.
The SPDR S&P Oil & Gas Exploration & Production ETF takes a different approach. Whereas those ETFs weigh their holdings by market cap, this oil stock ETF tracks a modified equal-weighed index of oil and gas companies. It provides unconcentrated exposure to oil and gas producers, currently holding 52 energy stocks with relatively equal weightings.
Its largest holding was natural gas producer Antero Resources, with a 3.1% weighting. Meanwhile, ExxonMobil was its 10th largest holding at 2.7%. Overall, its top 10 holdings comprised only about 27% of the fund's value. This broader diversification enables smaller, faster-growing energy companies to have a greater impact on its value. In turn, that has helped fuel stronger performance by this fund over the past year:
However, there are some caveats. The ETF charges a higher expense ratio than those rival funds, at 0.35% vs. 0.09% for the Energy Select Sector fund and 0.1% for Vanguard Energy. That higher expense ratio will eat into the fund's returns over the long term.
On top of that, it's important to note that this fund's price will likely be more volatile than those other ETFs, given its broader exposure to smaller energy companies. Of course, this volatility can also work in your favor during periods of rising oil prices.
