Benefits and risks of investing in energy ETFs
When researching the best energy ETFs, consider these benefits.
- Hedge against geopolitical risk: Energy prices often rise during wars, supply disruptions, or geopolitical tensions, which can benefit energy producers and the ETFs that hold them.
- Hedge against inflation: Energy commodities such as oil and natural gas are key inputs across the economy. When inflation rises, energy prices often increase, which can boost the revenues and profits of energy companies.
- Above-average dividend yields: Many energy companies generate strong cash flow and return a large portion of it to shareholders through dividends and share buybacks, resulting in yields higher than the broader market.
Before you invest in the best energy ETFs, keep these risks in mind.
- Higher volatility: Energy stocks tend to be more volatile than the broader market because their earnings are closely tied to commodity prices, which can swing sharply with changes in supply and demand.
- Vulnerable to demand destruction: High energy prices can eventually reduce consumption as households and businesses cut back or switch to alternatives, putting downward pressure on prices and energy companies' profits.
- Environmental, social, and governance (ESG) and regulatory risks: Environmental regulations, climate policies, and the global push toward lower-carbon energy sources can create long-term uncertainty for fossil fuel producers and the funds that hold them.
Methodology: How these energy ETFs were chosen
We focused on energy ETFs that are practical to own and trade, prioritizing substantial assets under management and strong trading liquidity. A larger asset base generally reduces closure risk, while healthy trading volume and tight bid-ask spreads can lower the implicit cost of entering and exiting a position. Expense ratios were another important consideration because fees directly reduce investor returns over time.
We also looked closely at diversification. Rather than concentrating exclusively on one narrow corner of the energy market, our selections provide exposure across different segments of the value chain, including exploration and production, integrated oil and gas companies, refining, midstream infrastructure, equipment, and services.
