These energy ETFs benefit from high oil prices.
High-flying technology and growth stocks faltered this year amid rising interest rates, while more traditional value stocks held their ground. In particular, the energy sector was a resurgent force, strongly outperforming the S&P 500 index. While the broader market remains in the red, the energy sector is still up more than 35% year to date as measured by the Energy Select Sector SPDR Fund (ticker: XLE). During COVID, the sector tanked as oil prices went negative and lockdowns ensued. However, high inflation in 2022 and soaring commodities prices reversed this trend, allowing the sector to boom amid higher share prices and stronger earnings. The sector continues to experience strong momentum as natural gas prices remain elevated, thanks to supply chain constraints and the conflict with Russia, a large producer and exporter of oil and gas. Investors looking to tilt their portfolio toward the energy sector can use these seven exchange-traded funds, or ETFs, to do so.
Energy Select Sector SPDR Fund (XLE)
The most popular method of indexing the energy sector is via XLE. As one of State Street’s 11 “Select Sector” funds, XLE tracks the Energy Select Sector Index, comprising 21 energy stocks from the S&P 500. Most of the ETF is dominated by two large-cap U.S. energy stocks: Exxon Mobil Corp. (XOM) and Chevron Corp. (CVX), respectively. Together, these two titans account for roughly 45% of the ETF’s holdings. Overall, XLE is best suited for hands-off investors bullish on U.S. large-cap energy stocks, as the fund tends to be quite concentrated there with just 21 holdings. Like the rest of the Select Sector funds, XLE costs a relatively low expense ratio of 0.1%. The ETF is highly popular and liquid, having attracted assets under management of roughly $35 billion.
Vanguard Energy ETF (VDE)
Passive index investors looking for a tilt to the energy sector but not wishing to limit their picks to energy stocks from the S&P 500 can consider VDE in lieu of XLE. VDE tracks the Spliced U.S. Investable Market Energy 25/50 Index, which holds a total of 111 stocks, making it much more diversified than XLE. Like XLE, VDE also has Exxon Mobil and Chevron as its top two holdings, but in much smaller proportions at 37% combined. The next-largest holdings in VDE are ConocoPhillips (COP) and EOG Resources Inc. (EOG) at 7.2% and 4.1%, respectively. So far in 2022, VDE has outperformed strongly with a roughly 35% total return through June 27. XLE pays a decent 30-day SEC yield of 2.3%. Like XLE, VDE also costs a low expense ratio of 0.1%.
Invesco Dynamic Energy Exploration & Production ETF (PXE)
Investors favoring a more active management approach for their energy sector picks can consider PXE. This ETF tracks an index of 30 U.S. energy sector companies involved in the exploration and production of energy resources. The fund employs screeners that assess potential holdings for various factors, such as price-earnings momentum, quality, management and value. In terms of top holdings, major companies include Occidental Petroleum Corp. (OXY), Valero Energy Corp. (VLO), Comstock Resources Inc. (CRK) and Marathon Petroleum Corp. (MPC). Compared to XLE, PXE holds more companies involved with the crude oil and natural gas industries, making it less broadly focused as a result. Invesco has waived a portion of the expense ratio, resulting in an expense ratio of 0.63% through at least Aug. 31, 2023.
VanEck Oil Services ETF (OIH)
OIH is another example of an energy sector ETF that targets a particular subset of industries. In this case, OIH tracks the MVIS U.S. Listed Oil Services 25 Index, which focuses on the stocks of upstream oil sector companies involved in oil equipment, services or drilling activities. The ETF screens holdings for sufficiently high market capitalization and trading volume, which ensures the companies represented are generally liquid large-cap stocks. Unlike XLE, OIH has more of a global focus. Around 71% of the ETF is weighted toward U.S. companies, with the remainder based in Mexico (19%), the Netherlands (5.3%) and the U.K. (4.6%). Top underlying holdings include Halliburton Co. (HAL), Baker Hughes Co. (BKR) and Schlumberger Ltd. (SLB). OIH costs an expense ratio of 0.35%.
First Trust Natural Gas ETF (FCG)
A large portion of the energy sector is natural gas. While investors can buy commodity ETFs that contain natural gas futures contracts, that approach is expensive and volatile. A better option for gaining exposure to natural gas is via FCG, which holds the stocks of 44 U.S. companies involved in the exploration and production of natural gas. Like OIH, FCG screens potential holdings for sufficient market capitalization and trading volume to ensure holdings are large and liquid enough. Notable current holdings include EQT Corp. (EQT), Occidental Petroleum, DCP Midstream LP (DCP) and Antero Resources Corp. (AR). The ETF rose sharply this year due to sanctions imposed on Russia, a large exporter and reserve holder of natural gas worldwide, but it has since leveled off some. Still, FCG is up more than 35% year to date. The ETF has an expense ratio of 0.6%.
ProShares Ultra Oil & Gas (DIG)
Investors looking to day- or swing-trade the volatile energy sector can do so using a leveraged ETF like DIG, which provides exposure to two times the daily performance of the Dow Jones U.S. Oil & Gas Index. DIG holds the stocks of 36 U.S. companies involved in oil-drilling equipment, pipelines, storage, liquids, solid or gaseous fossil fuels, and energy services, and also purchases derivatives called swaps to obtain two times daily resetting leverage. As a leveraged ETF, DIG is highly volatile and can produce unpredictable returns if held for periods longer than a day due to compounding and volatility decay. Due to this, DIG is best suited for advanced investors with a high risk tolerance looking to speculate short term in the energy sector. The ETF is also rather costly with an expense ratio of 0.95%.
Direxion Daily Energy Bull 2x Shares (ERX)
ERX is basically a juiced-up version of XLE with two times daily resetting leverage, as both ETFs track the identical Energy Select Sector Index. This means that ERX holds the same companies as XLE does, but with the addition of derivative swaps. Like DIG, ERX is best suited for traders looking to speculate short term or take advantage of price momentum in the energy sector. The two times leverage is only accurate on a daily basis. If held for longer than a day, ERX’s returns can vary significantly from this target, and over time can decay significantly if volatility trends high. As with most leveraged ETFs, ERX has a high expense ratio of 0.95%.
7 best energy ETFs to buy now:
— Energy Select Sector SPDR Fund (XLE)
— Vanguard Energy ETF (VDE)
— Invesco Dynamic Energy Exploration & Production ETF (PXE)
— VanEck Oil Services ETF (OIH)
— First Trust Natural Gas ETF (FCG)
— ProShares Ultra Oil & Gas (DIG)
— Direxion Daily Energy Bull 2x Shares (ERX)
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Update 06/28/22: This story was published at an earlier date and has been updated with new information.