Don’t overlook these energy funds.
The energy sector has seen plenty of ups and downs in 2020. For all the talk of volatility in oil markets or the challenges posed by the transition to renewable energy sources, the bottom line is that energy is crucial to the proper functioning of the global economy — so one way or another, energy stocks have an important role to play in your portfolio. The good news for interested investors is that energy exchange-traded funds allow many different ways to play the sector, whether you’re interested in Big Oil stocks or clean energy plays that are part of the solution to climate change. Whatever your strategy, there’s likely a fund for you. Consider these seven energy ETFs now.
Energy Select Sector SPDR Fund (ticker: XLE)
With almost $9 billion in assets under management, the XLE fund is perhaps the preeminent energy ETF on Wall Street. Unfortunately, it’s far from the most diversified energy fund out there, with a market-cap weighted structure that focuses on the biggest of the Big Oil stocks. Specifically, the duo of Exxon Mobil Corp. (XOM) and Chevron Corp. (CVX) represent more than 45% of the entire portfolio at present — and the ETF only has 25 total holdings altogether. That may or may not be a bad thing, depending on your investment goals, but this large weighting is certainly worth pointing out. XLE has a low annual expense ratio of 0.13%, or $13 for every $10,000 invested.
iShares Global Energy ETF (IXC)
If you want to get away from the U.S. energy behemoths, then this top iShares oil ETF provides an alternative. Rather than just bulking up on domestic Big Oil names, this fund is expanded to roughly 60 holdings and includes companies from across the globe. After all, U.K. oil giant BP (BP) and Netherlands-based Royal Dutch Shell (RDS.A) are multinational firms with just as much influence in most regions as Exxon and Chevron. Though it only has about $700 million in assets under management, this could be a preferable oil ETF if you want a diversified view of the sector. IXC comes with a higher expense ratio of 0.46%.
VanEck Vectors Oil Services ETF (OIH)
Of course, Big Oil isn’t the only way to go. This VanEck fund focuses on service stocks. While it’s still a bit top-heavy with about 30% of its portfolio in two big names — Schlumberger (SLB) and Halliburton (HAL) — it’s otherwise spread out across 25 total positions that exclude the integrated oil companies that dominate XLE or IXC. Furthermore, if you really want to be bullish on energy, then these service providers tend to be the best cyclical investment as they ramp up faster when things are good. They can also run into trouble faster when things roll over. For those looking to directly play the sector, this may be an energy ETF worth pursuing, despite the risk. Its expense ratio is 0.35%.
SPDR S&P Oil & Gas Exploration & Production ETF (XOP)
Perhaps the most diversified ETF among oil and gas stocks is this nearly $2 billion fund that focuses on exploration and production stocks. The good news is that it’s very diversified across 40 or so holdings, without one big name dominating the lineup. Some potentially bad news, depending on your strategy, is that you won’t find any of the bigger and thus more entrenched names in the sector. For aggressive traders looking to play the smaller, high-risk and high-reward companies that are closely linked to oil prices and the volume of reserves they control, this may be just fine. Others who are less interested in stocks like Parsley Energy (PE) and Concho Resources (CXO) may want to stick to the other funds, despite their Big Oil bias. XOP has an expense ratio of 0.35%.
Alerian MLP ETF (AMLP)
Of course, oil prices have been fairly volatile in 2020 — including futures prices for West Texas Intermediate crude oil that briefly went negative in April. At the same time, the U.S. has steadily grown its output of natural gas. As a result, this ETF from Alerian may be worth a look because it focuses on energy infrastructure players such as Cheniere Energy (LNG), a major operator of natural gas pipelines and processing facilities. Structured as master limited partnerships, or MLPs, these unique energy stocks play a vital role in connecting domestic supplies with international demand, and AMLP is one of the best MLP ETFs for investors who want exposure to this trend. It comes with a higher expense ratio of 0.87%.
Invesco Solar ETF (TAN)
If you want to look past fossil fuels, a popular solar ETF on Wall Street right now is TAN. In fact, this Invesco ETF is larger than many other traditional energy funds as measured by its roughly $2 billion in assets and volume that normally tops 1 million shares daily. It holds the biggest names in the sector, including First Solar (FSLR) and SolarEdge Technologies (SEDG). There are only about 30 or so companies in the fund, but as TAN targets a narrow segment of the energy sector, that may not be too much of a drawback for potential investors. The expense ratio for this fund is 0.71%.
iShares Global Clean Energy ETF (ICLN)
If you want to explore a clean energy ETF that looks beyond just solar — and the U.S. — this iShares fund allows you to do that. TAN components like First Solar make an appearance, but there are also utilities such as Meridian Energy (MEL) that derive a large part of their electricity from renewable sources and industrial stocks such as Vestas Wind Systems (VWS), which specializes in wind turbines. With more than $2 billion in assets under management, this is another clean energy ETF that outpaces many traditional funds in the space. ICLN has an expense ratio of 0.46%.
Seven energy ETFs to buy:
— Energy Select Sector SPDR Fund (XLE)
— iShares Global Energy ETF (IXC)
— VanEck Vectors Oil Services ETF (OIH)
— SPDR S&P Oil & Gas Exploration & Production ETF (XOP)
— Alerian MLP ETF (AMLP)
— Invesco Solar ETF (TAN)
— iShares Global Clean Energy ETF (ICLN)
More from U.S. News