It’s easy to think of energy sector stocks as a monolithic entity only useful for speculating on spiking commodity prices, but the reality is that the sector offers more specific applications and variety.
While you can gain palpable energy exposure just by investing in the five “super-majors,” or Big Oil, which includes Exxon Mobil Corp. (ticker: XOM), Chevron Corp. (CVX), Shell PLC (SHEL), BP PLC (BP) and TotalEnergies SE (TTE), there’s greater versatility by buying an exchange-traded fund, or an ETF.
For example, an energy ETF focusing on upstream companies involved in oil exploration and production can be useful in protecting against high inflation. This is because these companies tend to benefit from rising commodity prices, which directly feed into their revenues and earnings.
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“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,” says Nick Kalivas, head of factor and core equity product strategy at Invesco. “The disciplined capital spending and focus on shareholders has the potential to support oil prices and cash flow generation.”
On the other hand, an energy ETF focusing on midstream companies such as incorporated pipelines and master limited partnerships (MLPs) can be useful for producing steady income, primarily due to the relatively stable cash flows paid from their infrastructure-like assets.
“Midstream companies handle the transportation of petrochemicals and natural gas and rely on long-term contracts with corporate clients in the energy industry,” says Kenny Zhu, income research analyst at Global X ETFs. “This makes them less susceptible to short-term trends like energy prices and more reliant on transport and storage volumes.”
Here are seven of the best energy ETFs to buy in 2024:
| ETF | Expense ratio |
| iShares Global Energy ETF (IXC) | 0.44% |
| Energy Select Sector SPDR Fund (XLE) | 0.09% |
| Vanguard Energy ETF (VDE) | 0.10% |
| Invesco S&P 500 Equal Weight Energy ETF (RSPG) | 0.40% |
| SPDR S&P Oil & Gas Exploration & Production ETF (XOP) | 0.35% |
| Global X MLP ETF (MLPA) | 0.45% |
| Global X MLP & Energy Infrastructure ETF (MLPX) | 0.45% |
iShares Global Energy ETF (IXC)
“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.
If you want maximum diversification within the energy sector, the ETF to watch is IXC. By tracking the S&P Global 1200 Energy 4.5/22.5/45 Capped Index, this ETF offers global diversification with exposure to all the super-majors in its top 10 holdings. It charges a 0.44% expense ratio and pays an above-average distribution, amounting to a 3.4% 30-day SEC yield at present.
Energy Select Sector SPDR Fund (XLE)
“We prefer energy ETFs that are market-capitalization-weighted versus equal-weighted,” says Adam Grossman, global equity chief investment officer and partner at RiverFront Investment Group. “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.” The ETF to watch for this role is XLE.
XLE targets a market-cap-weighted index of energy stocks drawn from the broader S&P 500 index. It is a top-heavy ETF, with ExxonMobil and Chevron weighing in at 23.3% and 17.7%, respectively. If you’re actively looking to trade the energy sector, this ETF is ideal given its low 0.01% 30-day median bid-ask spread and options chain. However, it is also affordable as a buy-and-hold ETF, with a 0.09% 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’s benchmark, the Investable Market Energy 25/50 Index, is also market-cap-weighted. Thus, the top holdings of this ETF are similar to XLE, with ExxonMobil and Chevron dominating. However, VDE’s benchmark is not limited to selecting energy stocks from the S&P 500. Thus, it also holds many more mid- and small-cap energy stocks. The ETF charges a 0.1% expense ratio and pays a 2.8% 30-day SEC yield.
Invesco S&P 500 Equal Weight Energy ETF (RSPG)
If you dislike the top-heavy nature of market-cap-weighted energy ETFs, you can use an equal-weighted energy ETF like RSPG. This ETF essentially isolates the energy stocks from the S&P 500 but assigns each one an equal weight irrespective of size. Thus, you benefit from the earnings screener of the S&P 500 index and gain higher exposure to underrepresented mid-cap energy stocks.
“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 active index strategy used by RSPG results in a higher 0.4% expense ratio, four times higher than VDE and XLE.
[See: 7 Top-Performing Equal-Weight ETFs to Buy]
SPDR S&P Oil & Gas Exploration & Production ETF (XOP)
Investors can also employ an equal-weighted strategy within certain energy sector industries, such as the upstream exploration and production segment. The ETF to use for this role is XOP, which tracks the S&P Oil & Gas Exploration & Production Select Industry Index. This benchmark selects small-, mid- and large-cap upstream energy stocks from the S&P Total Market Index and equal-weights them.
The equal-weighted nature of XOP means that a large integrated energy company like ExxonMobil is given a 3% weight, the same as a smaller one like Chord Energy Corp. (CHRD). However, investors buying this ETF should be mindful of high volatility. Historically, the companies in XOP have suffered deep drawdowns, such as during the March 2020 COVID-19 crash, when oil prices went negative.
Global X MLP ETF (MLPA)
“MLPs typically pay high yields at consistent intervals thanks to their partnership structure, which allows these firms to avoid corporate-level income taxes,” Zhu notes. “However, the partnership structure of MLPs necessitates that buyers of MLPs must file Schedule K-1s with their annual tax returns, thereby leading to added tax complexity and costs.” To avoid this, investors can buy MLPs via an ETF like MLPA.
“ETFs like MLPA handle Schedule K-1s at the fund level, negating the need for added tax filings, while offering exposure to the high yields generated by MLPs in a convenient and diversified investment vehicle,” Zhu explains. For a 0.45% expense ratio, MLPA holds 20 leading MLPs tracked by the Solactive MLP Infrastructure Index. The ETF currently pays a 7.2% 30-day SEC yield.
Global X MLP & Energy Infrastructure ETF (MLPX)
“Distinct from traditional midstream funds, which primarily hold MLPs, MLPX also invests in corporate entities from across the midstream segment, including corporations and general partners of midstream partnerships,” Zhu notes. Non-MLP names in MLPX that you may be familiar with include pipeline companies Enbridge Inc. (ENB), TC Energy Corp. (TRP), Kinder Morgan Inc. (KMI) and Oneok Inc. (OKE).
The 5.6% 30-day SEC yield offered by MLPX is not only above-average, but also fairly tax-efficient. “We think this strategy provides greater tax efficiency through its registered investment companies (RIC)-compliant structure,” Zhu says. “Funds structured as RICs are taxed as pass-through entities, which can avoid corporate-level tax.” MLPX charges the same 0.45% expense ratio as MLPA does.
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7 Best Energy ETFs to Buy Now originally appeared on usnews.com
Update 07/30/24: This story was previously published at an earlier date and has been updated with new information.
