Oil prices are on the rebound.
Investors in oil and gas stocks haven’t had much to be cheerful about for the last few years. Crude oil traded over $100 a barrel as recently as 2014, but fell steadily after that until it hit a once-in-a-generation low of less than $30 a barrel by 2016. The second half of 2017, however, sparked a turnaround of sorts for energy prices. A steady uptrend over the last several months has allowed crude to fight back to its highest level since mid-2015. Looking ahead to 2018, there’s reason to expect this tailwind to continue for many stocks in the sector.
Vanguard Energy ETF (ticker: VDE)
When you’re thinking of playing a sector, it’s always best to start with the broadest and cheapest fund out there before drilling deeper. That’s exactly what VDE offers, with Vanguard’s characteristically low annual fees. Covering 143 of the biggest names in the sector, this exchange-traded fund is a who’s who of oil and gas stocks. Top holdings include Chevron Corp. (CVX), oilfield service giant Halliburton Co. (HAL) and mega-cap Exxon Mobil Corp. (XOM). Of course, as a market-cap weighted fund these big stocks are the lion’s share of the portfolio. In fact, the top 10 positions represent roughly two-thirds of the entire portfolio.
Expenses: 0.1 percent, or $10 annually per $10,000
iShares Global Energy ETF (IXC)
Of course, while Exxon and Chevron are undoubtedly huge, there are plenty of other oil giants. And if you’re globally minded, you may want to consider the iShares IXC fund to include those players. Domestic large-cap energy stocks make up about half the portfolio, but international energy stocks including BP (BP) and Royal Dutch Shell (RDS.A) add some nice geographic diversification to the list. This is decidedly not an emerging market fund, however, with regions like China and Brazil representing 2 percent or less of the total portfolio. It’s largely European nations and Canada that round out the fund.
Expenses: 0.48 percent
PowerShares S&P SmallCap Energy Portfolio (PSCE)
Want to play the up-and-coming energy stocks that could benefit most from a recovery? Then consider playing small-cap stocks in the space via the PSCE. Top holdings aren’t household names, including independent explorer PDC Energy (PDCE) and U.S. Silica Holdings (SLCA) that produces specialized sand for fracking companies. So rather than do your research on individual small caps in the space, you can rely on this fund of 28 stocks instead. Of course, just 28 stocks means this fund comes with its own risks. A few duds can really cause a drag on total performance — but conversely, just a few winners can really add up.
Expenses: 0.29 percent
SPDR Oil & Gas Exploration ETF (XOP)
A similar twist to going small is simply to invest in the energy chain — the explorers who pull crude oil and natural gas out of the ground. These are the companies that are hardest hit when energy prices crash, but they see the biggest uptick when prices stabilize. These aren’t all no-name stocks, with mid-sized Standard & Poor’s components like Marathon Oil Corp. (MRO) and Noble Energy (NBL) in there. However, other lesser-known companies like Parsley Energy (PE) and Callon Petroleum Co. (CPE) round out the 68 holdings. While these stocks may benefit more from an oil upswing, any collapse in prices may hit them harder than the big integrated stocks.
Expenses: 0.35 percent
Guggenheim S&P 500 Equal Weight Energy ETF (RYE)
If bias toward a group of stocks bothers you, whether those stocks be large or small, then take a look at the RYE. This fund is balanced across every energy name within the S&P 500 index. That’s only 32 names, believe it or not, so each position has a roughly 3.2 percent weighting — and the Guggenheim fund rebalances regularly to keep that balance. Those who care more about true diversification should consider the Guggenheim fund. And with a low net expense ratio, you’re not paying an affordable premium for that strategy.
Expenses: 0.4 percent
John Hancock Multi-Factor Energy ETF (JHME)
Another way to mix up your energy investments is to take a slightly more selective ETF like JHME, which selects stocks based on specific factors such as profitability or relative value versus peers in the sector. This is a smaller fund, with only about $30 million in assets under management, but unique in that it finds the middle ground between the rigid constraints of prior funds. For instance, its top holdings still include Exxon and Chevron but they are only at about 5 percent weighting each. At the same time, a little-known midcap stock Andeavor (ANDV) makes the top 10. This is an interesting alternative to plain vanilla sector funds in the energy space.
Expenses: 0.5 percent
Alerian MLP ETF (AMLP)
Interested in energy largely for the dividends? Most of these aforementioned ETFs will pay you a nice 3 percent or so thanks to distributions from well-heeled holdings. However, the juiciest dividends come from master limited partnerships, or MLPs, instead of widely-held integrated energy giants. That’s because MLPs are run like partnerships, and any shareholder gets a direct stake in the profits of the company. Typically these partnerships own and operate pipelines and other energy infrastructure, so they have very reliable revenue streams as they move crude oil and natural gas around the global economy to meet demand. Current quarterly payouts yield roughly 7.5 percent.
Expenses: 1.42 percent
More from U.S. News
10 ETFs That Pay Sky-High Dividends
7 ETFs for a Solid Portfolio Defense
7 Energy ETFs to Watch in 2018 originally appeared on usnews.com
