The energy sector has again been thrust into the spotlight this year, significantly impacted by escalating geopolitical tensions in the Middle East.
The current conflict began with an unexpected attack on Israel by the militant Palestinian group Hamas on Oct. 7, 2023, which has since expanded to involve neighboring countries.
In early April, an Israeli airstrike targeted Iran’s consulate in Damascus, Syria. This operation resulted in the deaths of Mohammad Reza Zahedi, a senior commander of the Iranian Revolutionary Guards Corps Quds Force, his deputy and five other Iranian officers.
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Iran’s response was swift, with Foreign Minister Hossein Amir Abdollahian vowing retaliation. Subsequently, on April 13, Iran executed a large-scale missile and drone assault on Israel. The conflict escalated further when Israel conducted reciprocal airstrikes on Iranian air bases on April 19.
Despite the severity of these exchanges, tensions have since de-escalated somewhat, with both sides limiting their military responses and downplaying the incidents, alleviating global fears of a broader regional conflict erupting for the time being.
However, these developments have led to a steady rise in oil futures prices, a common reaction to increased geopolitical risk as oil markets are historically sensitive to regional instabilities, especially those in the Middle East.
“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.”
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.”
Given these complexities, investors might consider diversifying their focus beyond oil futures to include stocks of integrated energy companies, oil and gas explorers and producers, midstream transportation, and energy support services instead.
While OPEC controls over 80% of the world’s proven oil reserves, the remainder lies with a few publicly traded giants often referred to as the “super-majors,” or “Big Oil,” which includes names like Exxon Mobil Corp. (ticker: XOM), Chevron Corp. (CVX), Shell PLC (SHEL), BP PLC (BP) and TotalEnergies SE (TTE).
These stocks represent investment opportunities that can provide exposure to the energy sector beyond the direct purchase of oil futures. By holding these stocks via an energy exchange-traded fund, or ETF, investors can gain greater diversification and liquidity.
“Energy ETFs offer investors a strategic tool to gain exposure to the sector’s growth potential while providing diversified exposure across energy sub-sectors, making them a great addition for portfolios looking to find some stability amidst geopolitical fluctuations,” says Joseph Spina, vice president at Northeast Private Wealth Management, an independent, New York-based private investment firm.
Here are seven of the best energy ETFs to buy in 2024:
| ETF | Expense ratio |
| iShares Global Energy ETF (IXC) | 0.44% |
| Vanguard Energy ETF (VDE) | 0.10% |
| Energy Select Sector SPDR Fund (XLE) | 0.09% |
| Invesco S&P 500 Equal Weight Energy ETF (RSPG) | 0.40% |
| Invesco Energy Exploration & Production ETF (PXE) | 0.60% |
| Global X MLP & Energy Infrastructure ETF (MLPX) | 0.45% |
| VanEck Oil Services ETF (OIH) | 0.35% |
iShares Global Energy ETF (IXC)
“Last week, markets were reassured at the ability of Israel to repel the Iranian drone attack, but the potential for retaliation can shock the system,” Spina says. “OPEC is the impact player when it comes to balancing the oil and gas market, but the current geopolitical conditions leave their ability and desire to raise production to question, which remains an upside risk to oil prices.”
For a globally diversified approach to energy investing, consider IXC. This ETF holds all five of the aforementioned super-majors in its top holdings and has a strong tilt toward integrated oil and gas firms, at 54% of its portfolio. Overall, the ETF tracks the S&P Global 1200 Energy 4.5/22.5/45 Capped Index, has 53 holdings and pays a decent 3.2% 30-day SEC yield. IXC charges a 0.44% expense ratio.
Vanguard Energy ETF (VDE)
“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. “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.”
VDE tracks the MSCI U.S. Investable Market Energy 25/50 Index, which holds 114 domestic market-cap-weighted energy stocks. The portfolio is dominated by Exxon Mobil and Chevron at 22% and 14%, respectively, with oil exploration and production giant ConocoPhillips (COP) coming in third at 7.3%. VDE pays an above-average 2.7% 30-day SEC yield and 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 example, Exxon Mobil and Chevron currently sport double-digit operating and profit margins, a sign of good financial health and efficiency.
To focus on the largest energy stocks found in the S&P 500 index, investors can buy XLE. As a market-cap-weighted index ETF, the fund puts an emphasis on Exxon Mobil and Chevron, at 23% and 16.6% of holdings, respectively. But compared to VDE, XLE is less diversified, with just 23 holdings due to its focus on S&P 500-listed energy stocks, which excludes some mid-caps and small caps. XLE charges a 0.09% expense ratio.
Invesco S&P 500 Equal Weight Energy ETF (RSPG)
While the super-majors tend to captivate the bulk of investor attention and inflows, smaller energy companies may offer greater growth potential. To weigh these companies higher while still ensuring adequate diversification, investors can opt for RSPG. This ETF essentially takes the S&P 500 energy sector stocks and weights them equally, which results in a higher concentration of mid-caps.
“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.” However, the more frequent turnover results in RSPG charging a higher 0.4% expense ratio.
Invesco Energy Exploration & Production ETF (PXE)
“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.” To focus on upstream exploration and production companies, Invesco offers PXE.
Unlike the previous ETFs, PXE does not hold any of the integrated super-majors such as Exxon Mobil or Chevron. Instead, its focus is on companies that are solely involved in the initial stages of locating oil and gas deposits and the subsequent extraction of these resources. Notable top holdings in PXE include Valero Energy Corp. (VLO), Marathon Petroleum Corp. (MPC) and ConocoPhillips. PXE charges a 0.6% expense ratio.
Global X MLP & Energy Infrastructure ETF (MLPX)
The portfolio of exploration and production companies within PXE relies heavily on midstream companies to transport their extracted products to refiners and markets. This segment includes both master limited partnerships (MLPs) and incorporated pipeline operators, which are integral to the energy infrastructure. To capture both these assets, Global X offers MLPX at a 0.45% expense ratio.
MLPs and pipelines are known for their operational structure that allows for high distribution of cash flow to shareholders, often making them attractive for their dividend yields. Moreover, midstream companies typically enter into long-term contracts for transportation and storage, which shields them somewhat from the cyclicality of oil prices. MLPX currently pays a 5.5% 30-day SEC yield.
VanEck Oil Services ETF (OIH)
Integrated giants, independent producers and midstream transportation firms all rely on the support of oil services companies to supply them with everything from drilling rigs and seismic testing equipment, to advanced software for geological data analysis and well simulation. This segment of the energy sector also includes maintenance support and clean-up services.
The oil services industry operates on a contractual basis, which allows it to plan and scale operations according to the demand cycles of the larger oil and gas market. However, this can result in high volatility. For exposure to the largest and most liquid oil services stocks, VanEck offers OIH. Notable holdings include Schlumberger Ltd. (SLB) and Halliburton Co. (HAL). OIH charges a 0.35% expense ratio.
[READ: 7 Commodity Stocks to Buy for Dividends, Inflation Hedging]
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7 Best Energy ETFs to Buy Now originally appeared on usnews.com
Update 04/22/24: This story was previously published at an earlier date and has been updated with new information.
