Which Oil ETF Is the Best to Play a Rebound in the Oil Market?

Photo credit: DieselDemon via Flickr.  

Depending on who you listen to, oil could either be heading for a crash near $20 per barrel or on the cusp of a breakout toward $70. That’s a pretty wide range and it’s really anyone’s guess what crude will do next. Having said that, there are signs on the horizon that the oil market is stabilizing as production is starting to decline in the U.S. even as demand is accelerating. This suggests that at some point oil prices could rebound, taking oil stocks with it.

While there’s a myriad of oil companies one could invest in to profit from such a rebound, it is quite possible to be right on the thesis but wrong on the vehicle to take you to that promised land. That’s why oil ETFs are a great choice for investors looking to participate in the rally without worrying about picking a company that might still struggle for any number of reasons. Here are three solid oil EFTs that will certainly do the trick.

1. Energy Select SPDR (XLE 0.46%)
This oil ETF aims to track the energy sector within the S&P 500 Index as it holds the energy companies that are tracked within that broader market index. At the moment, that’s 43 companies and each is weighted within the Energy Select SPDR by market size. So, given that Exxon Mobil is the largest oil company, it has the largest weighting in this oil ETF as it currently is 15.76% of the fund. Here’s a look at its top 10 holdings:

As of 6/30/15.

There are a few things worth noting about this particular fund. First, it doesn’t just own oil companies as three of the top 10 holdings are midstream or oil-field service companies. Moreover, it’s very concentrated at the top as it’s weighted to the larger oil companies as those top seven oil companies represent 45% of the fund.

One last thing worth noting is that the fund’s expense ratio is 0.16%.

2. Vanguard Energy ETF (VDE 0.49%)
This oil ETF has a much broader coverage of the energy sector as it holds a whopping 150 energy stocks. It is designed to track the much broader MSCI US Investable Market Index (IMI)/Energy 25/50 in an attempt to measure the investment returns of the energy industry. That gives it a broader exposure to the energy industry as a whole.

Having said that, it too is very much weighted toward the bigger players as Exxon has a whopping 21.9% weighting. Further, while just six of its top 10 holdings are oil companies, they represent 46% of the fund’s total holdings as we see in the chart below.

As of 8/31/15.

The other big differentiator between it and the Energy Select SPDR is its expense ratio, which is a bit lower at 0.12%.

3. iShares U.S. Oil & Gas Exploration & Production ETF (IEO 0.49%)
This oil ETF, on the other hand, is much more concentrated on the U.S. oil industry and is limited primarily to independent exploration and production companies, however, it does own some refiners. Overall, the fund holds 74 companies, with the largest holding being ConocoPhillips at 12.4%, which makes sense as it is the largest independent oil company in America. Here are its top 10 holdings: 

As of 9/17/15.

As we can see, seven of its top 10 holdings are large E&P companies and these seven stocks make up more than 46% of the total weighting. However, the fund does own minor stakes in nearly every publicly traded U.S. oil company, many of which are currently struggling under the weight of a lot of debt. That could prove to be a weight on future returns should some of these companies end up going belly up.

It’s also worth noting that in addition to that higher risk, there’s also a higher cost. This oil ETF comes with an expense ratio of 0.43%.

Investor takeaway
Investors have a number of oil ETF choices if they want broad exposure to a potential rebound in the oil industry. All three mentioned offer broad exposure as they hold a number of major oil companies that should, in theory, rise when oil prices improve. However, each takes a slightly different path so investors should make sure they know the holdings as well as the expenses before diving into any one of these oil ETFs.