Markets are once again troubled by the specter of geopolitical conflict. The Oct. 7 surprise attack on Israel by the militant Palestinian group Hamas has raised the odds of a broader conflict in a volatile region that is a key source of the world’s oil.
The ramifications of the confrontation in Gaza, with Israel declaring war and threatening to eliminate Hamas, are now reverberating well beyond the immediate region into global markets.
While the surge in defense stocks was an anticipated market reaction, a ripple was felt in the energy sector as well. Oil prices, in particular, experienced a notable surge.
“The oil markets will be trying to assess the risk of international relations that may impair oil assets,” says Nick Kalivas, head of factor and core equity product strategy at Invesco. “Investors are likely to see energy stocks as a way to mitigate geopolitical risks.”
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Adam Grossman, global equity chief investment officer at RiverFront Investment Group, agrees with Kalivas, noting: “Geopolitical risks are very high for energy stocks, as supply chain disruptions or conflicts can massively impact pricing.”
This sudden unrest in the Middle East therefore introduces another dimension to the present attractiveness of the energy sector. Notably, the sector, according to data from Finviz, is currently trading at low valuations. As of Oct. 17, the energy sector boasts the lowest price-to-earnings, or P/E, ratio at a mere 8.2. This stands in sharp contrast to the tech sector’s much higher 34.3 P/E ratio.
“Global oil and gas upstream capital spending has been relatively flat in recent years and there is an expectation that companies will be disciplined in spending,” Kalivas says. “The disciplined capital spending and focus on shareholders has the potential to support oil prices and cash flow generation.”
Further deepening the energy narrative are key domestic macro tailwinds, particularly concerning the depleted status of the U.S. Strategic Petroleum Reserve (SPR).
“Although the SPR has increased very modestly from its July low, it remains historically depleted at 351 million barrels,” Kalivas says. “The need to refill the SPR in the face of geopolitical uncertainty in the Middle East has the potential to provide support to the oil market.”
For investors drawn to the prospect of capitalizing on short-term energy sector fluctuations, or those viewing energy as a long-term value proposition bolstered by favorable macroeconomic fundamentals and valuations, energy exchange-traded funds, or ETFs, can provide the desired exposure.
These ETFs offer diversified, affordable and liquid exposure to energy sector stocks, ensuring that stakeholders can efficiently navigate and potentially benefit from the sector’s current dynamics.
“The main benefits of owning an energy ETF are not having to guess which company will outperform and reducing concentration risk by owning a broad basket of companies,” says Curtis Congdon, president of XML Financial Group.
Here’s a look at the seven best energy ETFs to buy now:
| ETF | Expense ratio |
| Vanguard Energy ETF (ticker: VDE) | 0.1% |
| Energy Select Sector SPDR Fund (XLE) | 0.1% |
| Invesco S&P 500 Equal Weight Energy ETF (RSPG) | 0.4% |
| Invesco Energy Exploration & Production ETF (PXE) | 0.6% |
| VanEck Oil Services ETF (OIH) | 0.35% |
| iShares Global Energy ETF (IXC) | 0.44% |
| Strive U.S. Energy ETF (DRLL) | 0.41% |
Vanguard Energy ETF (VDE)
“Vanguard has a popular offering in VDE that provides low-cost, high-yield, diversified exposure to companies involved in the exploration and production of energy products including oil, natural gas and coal,” Congdon says. This ETF has been around since September 2004, and has attracted over $8.6 billion in assets under management, or AUM, since inception.
By tracking the MSCI U.S. Investable Market Energy 25/50 Index, VDE provides exposure to just over 100 large-, mid- and small-cap U.S. energy stocks weighted based on their market capitalization. The ETF is dominated by large-cap energy stocks, with top holdings Exxon Mobil Corp. (XOM) and Chevron Corp. (CVX) accounting for 23.4% and 15.1% of the ETF, respectively. VDE charges a 0.1% expense ratio.
Energy Select Sector SPDR Fund (XLE)
“Generally, in energy we prefer ETFs that are market-capitalization-weighted versus equal weighted,” Grossman says. “We prefer this because we believe larger companies will have better access to capital and are more likely to have diversified businesses at the margin.” For concentrated exposure to 23 of the largest U.S. energy stocks, investors can buy XLE at a 0.1% expense ratio.
As one of State Street’s 11 “Select Sector” ETFs, XLE only holds energy stocks already contained in the S&P 500 index. As expected, energy giants Exxon Mobil and Chevron dominate XLE, accounting for 22% and 18.3% of the ETF’s weight, respectively. The ETF is highly liquid, with a tiny 0.01% 30-day median bid-ask spread, making it a popular tool for traders looking for energy sector exposure.
Invesco S&P 500 Equal Weight Energy ETF (RSPG)
Some investors may not like the fact that both VDE and XLE are highly concentrated in just two energy giants, Exxon Mobil and Chevron, respectively. For those seeking a more even portfolio allocation in a prospective energy ETF, Invesco offers RSPG, which equally weighs its 25 current holdings. Thus, large-, mid- and small-cap energy stocks are all given the same allocation.
“The quarterly rebalancing process for RSPG causes the fund to trim exposure to stocks that are above their equal-weight percentage and add to stocks that have fallen below their equal-weight percentage,” Kalivas says. “Therefore, there is a buy-low, sell-high dynamic that is present.” RSPG currently charges a 0.4% expense ratio and has attracted around $635 million in AUM.
Invesco Energy Exploration & Production ETF (PXE)
“U.S. oil production is currently trending toward record highs,” Kalivas says. “The Department of Energy’s Short-Term Energy Outlook forecasted production to average 12.8 million barrels per day in 2023 and 13.2 million barrels per day in 2024.” For exposure to the companies that are engaged primarily in energy exploration and production, investors can buy PXE.
This ETF tracks the Dynamic Energy Exploration & Production Intellidex index, which targets 30 U.S. energy stocks that explore, extract, produce, and refine crude oil and natural gas. The index employs a rules-based methodology that assesses eligible holdings based on momentum, earnings, quality and value. However, PXE does charge a higher 0.6% expense ratio.
[SEE: 11 Top Sector ETFs to Buy.]
VanEck Oil Services ETF (OIH)
Aside from targeting companies involved in exploration and production, investors can also focus on other parts of the energy supply chain. This includes companies that provide the necessary heavy equipment, personnel and financing to the energy sector. For exposure to these stocks, consider OIH, which tracks the MVIS U.S. Listed Oil Services 25 Index.
OIH has a large-cap focus, electing to focus on just the biggest U.S. listed energy companies such as SLB (SLB), Halliburton Co. (HAL) and Baker Hughes Co. (BKR), to name a few. However, keep in mind that this ETF has historically been very volatile. “Energy prices are cyclical, which leads to boom-and-bust behavior versus other industries that are more stable,” Grossman says.
iShares Global Energy ETF (IXC)
The energy sector doesn’t just end at U.S. stocks. Some of the most notable and largest energy companies like Shell PLC (SHEL), TotalEnergies SE (TTE), and BP PLC (BP) hail from the international stock market. For a global approach to energy sector investing, investors can buy IXC for a 0.44% expense ratio. This ETF tracks the S&P Global 1200 Energy 4.5/22.5/45 Capped Index, which currently has 52 holdings.
As expected, U.S. energy giants Exxon Mobil and Chevron still dominate IXC’s top holdings at 15.7% and 10.5%, respectively. That being said, the ETF is less top-heavy thanks to the inclusion of Shell, TotalEnergies and BP at 8%, 5.5% and 4.2%, respectively. U.S. stocks only account for 60% of this ETF, with U.K. and Canadian stocks coming in second and third at 12.2% and 11.3%, respectively.
Strive U.S. Energy ETF (DRLL)
Energy sector investors looking to get a taste of shareholder activism with their investment may like DRLL, which makes proxy voting for its underlying companies a key focus. Strive Asset Management, the firm behind DRLL, is known for its “anti-ESG” stance, which the firm describes as a “shareholder primacy” principle that aims to maximize returns while disregarding ESG consideration.
The ETF itself tracks the Solactive United States Energy Regulated Capped Index, which resembles XLE and VDE in terms of top holdings. As expected, Exxon Mobil and Chevron are once again in the No. 1 and 2 spots, respectively, with a 21% and 15% weight, followed by ConocoPhillips (COP) at 7.8%. The ETF currently charges a 0.41% expense ratio.
[See: 7 Best ETFs to Buy Now.]
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7 Best Energy ETFs to Buy Now originally appeared on usnews.com
Update 10/17/23: This story was published at an earlier date and has been updated with new information.
