ETFs to consider as prices stay lower
Energy stocks took a beating in March when consumption rates dived, and the global glut compounded the problem as crude oil prices sank. As pandemic restrictions have eased and many areas have at least tentatively reopened, crude oil prices have rebounded to $39 a barrel as demand rose slightly. Investors should expect to see a “V-shaped recovery for gasoline,” while oil prices should recover “significantly” because the large supply cuts by OPEC have been effective, says Chris Midgley, global head of analytics at S&P Global Platts. OPEC+ extended its May and June quotas and supply cuts into July as some global demand has returned. Investors should remain cautious about the energy sector. Here are seven energy exchange-traded funds that could be a good addition since prices remain lower.
Energy Select Sector SPDR ETF (ticker: XLE)
The Energy Select Sector SPDR ETF remains the largest pure-play oil and gas company fund and has nearly $11 billion in total assets under management. Investors seeking a low-cost way to obtain exposure are paying an expense ratio of 0.13%, or $1.30 annually on every $1,000 invested. The fund has only 26 holdings since it’s weighted by size, with Chevron Corp. (CVX) and Exxon Mobil Corp. (XOM) about 43% of the portfolio. XLE has high exposure to the more stable integrated oil and gas companies, such as Chevron and Exxon Mobil, with relatively strong balance sheets and cash to support its dividends, says Todd Rosenbluth, head of ETF and mutual fund research at CFRA, a New York financial research company.
VanEck Vectors Low Carbon Energy ETF (SMOG)
The VanEck Vectors Low Carbon Energy ETF tracks the performance of the Ardour Global Index (Extra Liquid) (AGIXLT), the benchmark for the performance of companies from the biofuels, wind, solar, hydro and geothermal industries and the technology used to operate those companies. The top holdings include Microchip Technology (MCHP), which provides smart, connected and secure embedded control solutions; Tesla (TSLA), the electric vehicle manufacturer; and Ametek (AME), a manufacturer of electronic instruments and electromechanical devices. The one-year return of SMOG is 30.65%, and the three-year return is 10.26% with an expense ratio of 0.62%. This is an ETF that investors can use to diversify their portfolios into more sustainable investment, says Michael Underhill, chief investment officer of Capital Innovations.
Global X YieldCo & Renewable Energy Income ETF (YLCO)
The Global X YieldCo & Renewable Energy Income ETF focuses on the utility sector, allocating 89% to it. The financial sector makes up 7%, and the oil and gas industry 1.8%. The ETF generates a dividend yield of 3.2%, with an expense ratio of 0.65%. The top three holdings are Orsted (ORSTED DC), EDP (EDP PL) and Enel Americas (ENELAM CI) with a one-year return of 13.6% and a three-year return of 11.2%. Investments in the commercial and industrial solar industry, energy efficiency, electric vehicles and fuel cells will provide returns delivered by innovations throughout the recovery, Underhill says.
Vanguard Energy ETF (VDE)
The Vanguard Energy Index Fund has more than $3 billion invested in this fund and is diversified with about 70 total holdings, but has more than 40% of its holdings in Chevron and Exxon Mobil. Vanguard’s funds are well-known for often having the lowest expense ratios, and VDE has an expense ratio of 0.1%. “VDE can help mitigate the risk that comes with single-stock exposure and some of the inevitable volatility that comes with the energy market,” says Mike Loewengart, managing director of investment strategy at E-Trade. While the sector has been beaten down lately as the country reopens, energy could be poised for a rebound as travel resumes and more consumers return to the pump, he says.
Invesco S&P 500 Equal Weight Energy ETF (RYE)
The Invesco S&P 500 Equal Weight Energy ETF has about 30 stocks on the list. Equal-weight ETFs could be a better addition than market-weight funds since they buy the same amount of each stock despite the company’s market capitalization. The expense ratio is 0.4%. Energy ETFs are a lower-cost alternative for investors seeking diversified exposure to a basket of energy investments, Loewengart says. “Look under the hood at the securities that make up the energy ETF, and make sure you’re comfortable with the expenses associated with the fund,” he says.
Fidelity MSCI Energy ETF (FENY)
The Fidelity MSCI Energy ETF is a broader-based ETF since it holds about 83 stocks, including large concentrations in majors such as Exxon Mobil and Chevron while adding well-known companies such as ConocoPhillips (COP). This ETF is smaller in stature and has $497 million in assets, but boasts of a low expense ratio of 0.08%. Individual stock picking may be a go-to method for some investors, but they need to consider the amount of time it takes to dig deep into the fundamentals of each security, Loewengart says. “One potential risk is too much exposure to any one name, so investors should look at their entire portfolio before determining allocations,” he says.
SPDR S&P Oil & Gas Exploration & Production ETF (XOP)
The SPDR S&P Oil & Gas Exploration & Production ETF has about $2 billion in assets and provides a dividend yield of 2.64%. This ETF does not favor the big oil companies like the other funds and instead focuses on smaller ones. The top three holdings are EQT Corp. (EQT), Southwestern Energy Co. (SWN) and Range Resources Corp. (RRC), and the expense ratio is 0.35%. This fund could face more volatility since smaller stocks are directly exposed to the fluctuations of crude oil prices. “Since ETFs are passive investment vehicles and aim to mirror the benchmark, investors should assess the tracking difference,” Loewengart says. “The energy sector is dependent on futures markets, the price of crude oil and is subject to external factors that can affect supply and demand.”
Energy ETFs at lower cost:
— Energy Select Sector SPDR ETF (XLE)
— VanEck Vectors Low Carbon Energy ETF (SMOG)
— Global X YieldCo & Renewable Energy Income ETF (YLCO)
— Vanguard Energy ETF (VDE)
— Invesco S&P 500 Equal Weight Energy ETF (RYE)
— Fidelity MSCI Energy ETF (FENY)
— SPDR S&P Oil & Gas Exploration & Production ETF (XOP)
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