Pain at the pump is fueling profits.
Crude oil prices have marched steadily higher in the last 12 months, from less than $50 a barrel in August 2017 to about $70 a barrel at present. This ascent is obvious to anyone who has fueled their automobile lately. While higher oil prices do mean higher energy prices for consumers and businesses, they can also mean bigger profit margins for many energy stocks. Investors may be looking to offset the higher prices they pay at the pump with better returns. Here are nine energy-related exchange-traded funds to consider.
Energy Select Sector SPDR Fund (XLE)
The biggest energy sector fund, XLE boasts a massive $18 billion under management. It also has the biggest names in oil as its top holdings, including Exxon Mobil Corp. (XOM), Chevron Corp. (CVX) and service giant Schlumberger (SLB). However, the fund only holds 31 stocks and these three holdings make up nearly half of the entire portfolio thanks to a market-cap weighting that’s biased toward larger stocks. These factors make XLE an investment in the big energy stocks, but with a super-low expense ratio of just 0.13 percent or a mere $1.30 annually on every $1,000 invested, it’s still a simple and effective way to play oil’s rise.
Vanguard Energy ETF (VDE)
For an equally cost effective way to play energy stocks, consider the VDE fund instead. It boasts a bigger universe of about 140 total stocks at present, meaning it contains the big stocks that make up the bulk of XLE but also plenty of less-known firms. These include mid-sized refiner HollyFrontier Corp. (HFC) and exploration company Cabot Oil & Gas Corp. (COG). And, as is typical at Vanguard, this exchange-traded fund offers rock-bottom pricing at just 0.10 percent in expenses — a mere $1 annually on every $1,000 invested.
Invesco S&P 500 Equal Weight Energy ETF (RYE)
If top heavy ETFs cause you concern about their reliance on mega-caps like Exxon, consider this equal weight energy ETF. The goal is to spread out allocation across the holdings via regular rebalancing. With 31 holdings that means a target weighting of about 3.2 percent for each pick. And while some stocks do rise and fall based on their change in values day-to-day, right now not a single component represents more than 3.9 percent of the entire portfolio. After all, if you want to be focused on Exxon you can just buy the individual stock. If you want an energy fund that is truly diversified, RYE is it.
iShares Global Energy ETF (IXC)
The energy market is global in nature and there are oilfields around the world, so investors are not limited to domestic choices. Though only about 70 stocks make up IXC, it’s important to note that the small list covers pretty much every major energy stock in the developed world — from America’s Exxon to France’s Total SA (TOT) to Royal Dutch Shell (RDS) to the U.K.’s BP plc (BP). Although smaller firms are left out, investors seeking a high-level play on oil prices via the entrenched names in the sector will like what this iShares fund offers.
SPDR Oil & Gas Exploration ETF (XOP)
For investors looking to go smaller, State Street Global Advisors offers a great tactical play on explorers instead of integrated energy giants with its XOP fund. After all, the explorers who pull crude oil out of the ground are most exposed to the potential upside of rising oil prices since that is fundamentally what determines their operating margins. And with names like Diamondback Energy (FANG) among its top holdings, the good news is that XOP’s holdings are no small potatoes. Many picks are $10 billion or more in market capitalization and have mature enough operations to smooth some of the volatility inherent with energy exploration.
Invesco S&P SmallCap Energy ETF (PSCE)
Sometimes bigger isn’t better — at least, in a rising environment for oil prices. That’s because smaller companies are the most agile and can ramp up their production the fastest to take advantage of favorable conditions. Top holdings may not be household names, including independent explorer PDC Energy (PDCE) and SRC Energy (SRCI). And with just 33 holdings, this fund’s focus on a few smaller picks does focus your risk of declines should oil stumble. But as long as the environment remains bullish for crude oil, it will be bullish for this tactical energy ETF.
Tortoise North American Pipeline Fund (TPYP)
A unique way to play the energy sector, particularly for investors interested in consistent dividends, is this pipeline fund that invests in the companies behind the continent’s energy infrastructure. These include Enbridge (ENB) and Transcanada Corp. (TRP), which transport energy products including crude oil and natural gas liquids. The infrastructure focus has two main appeals. First, infrastructure is less exposed to price volatility since in many ways these companies are just toll takers as explorers send products to refiners and wholesalers. Second, the regular revenue from the use of these pipelines can fuel big time dividends. TPYP yields about 3.9 percent at present based on the last year of payouts.
United States Oil Fund (USO)
The USO fund offers the most direct play via an exchange-traded security that tracks price movements of oil — specifically, the price of West Texas Intermediate crude. This is done by focusing on “near month” crude oil futures contracts, meaning it invests in contracts for oil in a way that profits when crude oil rises over the next several weeks. But keep in mind that also means there’s no substantial dividend payout like many energy stocks, and no place to hide if oil prices decline.
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8 ETFs to Invest in Oil originally appeared on usnews.com
