9 of the Best Energy ETFs to Watch

The oil sector is worth watching.

Thanks to global trade tensions that could sap demand and oversupply concerns, the price of a barrel of oil is in the low $50s — recently touching its lowest level in more than a year. Some experts think this is only the beginning of pressures on the energy sector as the world faces a bit of an economic slowdown. Others think the sell-off is overdone thanks to continually strong metrics and the prospect of rising inflation. Whatever your point of view, the oil sector is certainly worth watching. Here are nine exchange-traded funds that track the energy industry in different ways.

Energy Select Sector SPDR Fund (ticker: XLE)

XLE is the largest energy sector fund as measured by assets under management, with about $15.5 billion in market value at present. It’s a simple way to play the sector, and a very liquid ETF that is reasonably priced, with an expense ratio of just 0.13 percent, or $13 annually for every $10,000 invested. It’s worth noting, however, that the fund is not very diversified. With 30 holdings and roughly 40 percent of the entire portfolio allocated to mega-caps Exxon Mobil Corp. (XOM) and Chevron Corp. (CVX), one big move in either of these stocks can really affect the fund. Still, the fund is popular and widely held.

Invesco S&P 500 Equal Weight Energy ETF (RYE)

If you don’t like putting all your eggs in one basket, you can avoid the overreliance on Exxon and Chevron with this fund. The RYE similarly has about 30 holdings spanning the largest and most influential energy stocks, but uses an equal-weight strategy and rebalancing to ensure each position represents about 3 percent of the portfolio. That adds diversification, but many large-cap energy stocks on this list like exploration player Occidental Petroleum Corp. (OXY) or oilfield service company Baker Hughes (BHGE) are in many ways subject to the same industry pressures and may not necessarily differ tremendously in their performance.

iShares Global Energy ETF (IXC)

One way to get beyond this short list of dominant U.S. energy players is to take a more international view. Thanks to this broader grouping of oil majors, this ETF including more than 70 stocks at present to more than double the amount of the prior funds. They are very similar to U.S. leader Exxon, however, with integrated energy giants like Royal Dutch Shell (RDS.A) to the U.K.’s BP (BP) on the list. So while there is a bit more diversification in theory, many of the names on the list still may be swayed by the same market trends.

iShares U.S. Oil & Gas Exploration & Production ETF (IEO)

This ETF consists of companies that work to find new oil and gas fields and bring them online — one of the riskiest elements of the supply chain, but also one with the most potential for profits. If you’re comfortable with a bit more risk and a bit more reward, this may be a good way to tap into the true potential of the energy sector if oil and gas prices get caught in an uptrend. With about 70 holdings that comprise familiar mega-caps like ConocoPhillips (COP) as well as smaller stocks like HighPoint Resources Corp. (HPR), you get a wide swath of this exploration segment within the energy sector.

VanEck Vectors Oil Services ETF (OIH)

Similar to exploration but materially different is oil field service firms, which provide equipment or on-site support services to energy companies. Smaller and specialized firms assist — and cash in — with their services. The biggest and most recognizable firms among this ETF’s 25 holdings are Halliburton Co. (HAL) and Schlumberger Ltd. (SLB), but there are also smaller firms like deep water specialist Oceaneering International (OII). These firms are often the first to see new business during an uptrend for the energy sector, but as contractors, they are often the first to be pinched in times of trouble.

First Trust Natural Gas ETF (FCG)

Another way to look beyond the typical players is to think more about natural gas instead of oil. That’s what this fund offers, with a group of 37 stocks less exposed to crude oil and focused on companies the fund says “derive a substantial portion of their revenues from the exploration and production of natural gas.” These include companies like Cabot Oil & Gas Corp. (COG), Cimarex Energy Co. (XEC) and Concho Resources (CXO) — picks that the typical large-cap energy ETF may never embrace.

Alerian MLP ETF (AMLP)

Another way to invest in natural gas and oil is to focus on energy infrastructure firms that offer stability and dividends instead of profits based on demand or price trends. If this sounds like you, then consider the AMLP ETF that holds some of the biggest energy infrastructure players in North America, including Magellan Midstream Partners (MMP) and Enterprise Products Partners (EPD). Since component companies are structured as partnerships that pass on a significant share of profits to investors, AMLP has a mandate for big dividends. At present, the fund has a yield of about 8.5 percent based on the last 12 months of distributions.

Invesco S&P SmallCap Energy ETF (PSCE)

This fund is populated by smaller firms out to make a name for themselves. PSCE consists of companies you may never have heard of, including fracking service provider U.S. Silica Holdings (SLCA) and pumping specialist ProPetro Holding Corp (PUMP). It’s often hard for investors to responsibly buy into these companies individually, because each tends to be focused on a small part of the energy supply chain and often is not as widely covered as the big oil names that dominate headlines. However, these 36 holdings make up a diversified list that can give your portfolio unique exposure to the energy sector with a single position.

John Hancock Multi-Factor Energy ETF (JHME)

Can’t decide which flavor of the energy sector to pursue for the best results? JHME takes the approach of looking at the balance sheet and picking the strongest performers. The 50-some holdings are selected based on profitability measures such as margins and valuation metrics. Think of it as a slightly more active way to invest in the energy sector based on what’s working and what’s not. Just keep in mind that no methodology like this is fool-proof, and even quantitative screens are not a guarantee your investments will go up if the sector as a whole takes a hit.

The best energy ETFs to watch

To recap, here are nine of the best energy ETFs to watch:

— Energy Select Sector SPDR Fund (ticker: XLE)

— Invesco S&P 500 Equal Weight Energy ETF (RYE)

— iShares Global Energy ETF (IXC)

— iShares U.S. Oil & Gas Exploration & Production ETF (IEO)

— VanEck Vectors Oil Services ETF (OIH)

— First Trust Natural Gas ETF (FCG)

— Alerian MLP ETF (AMLP)

— Invesco S&P SmallCap Energy ETF (PSCE)

— John Hancock Multi-Factor Energy ETF (JHME)

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