The U.S. stock market may be sitting at all-time highs, but plenty of potential volatility remains on the horizon heading into 2025.
Geopolitical unrest is a significant concern, with reports of North Korean troops joining Russian forces in Ukraine, escalating tensions between Israel, Iran and Lebanon, and the recent overthrow of the Assad regime by Syrian rebels, alongside Israel’s troop deployments and airstrikes in the region.
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Meanwhile, domestic inflation is proving stubborn. November saw a second consecutive monthly increase for the consumer price index (CPI) to 2.7% from October’s 2.6%, driven by slower-than-expected declines in gasoline and fuel oil prices, while natural gas prices ticked upward.
A simple way to hedge against these risks is by allocating part of your portfolio to energy stocks. Energy companies tend to perform well during inflationary periods as rising oil and gas prices boost their revenues, while geopolitical risks can tighten supply and further support prices.
Unlike commodity futures, energy stocks let you avoid pitfalls like contango, which occurs when futures prices are higher than the expected spot price. Contango often erodes returns when traders roll futures contracts over, making energy stocks a more straightforward choice for long-term investors.
Finally, energy companies today boast significantly improved fundamentals. After weathering the boom-and-bust cycles of the past, many large players have strengthened their balance sheets, reduced debt and improved margins, making them more resilient to the ups and downs of oil prices. The net result is improved free cash flow, which improves their capacity for dividend growth and buybacks.
“Higher-quality energy companies are very profitable today — many sell at single-digit multiples and are returning capital to investors at an accelerated rate,” says David James, managing director at Coastal Bridge Advisors. “For example, ConocoPhillips (ticker: COP) is on record guiding that they will return their entire market cap to investors over the next decade through share buybacks and dividends.”
Here are seven of the best energy exchange-traded funds (ETFs) to buy for 2025:
| ETF | Expense ratio |
| Vanguard Energy ETF (VDE) | 0.10% |
| Energy Select Sector SPDR Fund (XLE) | 0.09% |
| iShares Global Energy ETF (IXC) | 0.41% |
| iShares MSCI Global Energy Producers ETF (FILL) | 0.39% |
| Invesco Energy Exploration & Production ETF (PXE) | 0.63% |
| Invesco S&P 500 Equal Weight Energy ETF (RSPG) | 0.40% |
| Global X MLP & Energy Infrastructure ETF (MLPX) | 0.45% |
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.”
This ETF tracks the MSCI U.S. Investable Market Energy 25/50 Index, a benchmark of 112 market-cap-weighted energy stocks that tilts strongly toward large-cap oil giants like Exxon Mobil Corp. (XOM) and Chevron Corp. (CVX). Exxon and Chevron account for 21.7% and 13.3% of the ETF by weight, respectively. VDE charges a 0.1% expense ratio and pays an above-average 2.7% 30-day SEC yield.
Energy Select Sector SPDR Fund (XLE)
“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.
To focus on the 22 energy stocks contained in the S&P 500, consider XLE. This ETF undercuts VDE slightly with a lower 0.09% expense ratio and has a large-cap focus, with many similar top holdings. However, it offers a far more liquid options chain, making it more suitable for active traders. The large-cap, blue-chip energy stock focus also gives XLE higher income potential, with a 3.2% 30-day SEC yield.
iShares Global Energy ETF (IXC)
“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.” Both VDE and XLE are market-cap-weighted, but focused on the U.S.
For a global approach to energy investing, consider IXC. This ETF tracks the S&P Global 1200 Energy 4.5/22.5/45 Capped Index, which has 52 market-cap-weighted holdings. ExxonMobil and Chevron remain in the top two holdings, but the ETF also includes international “super-majors,” or Big Oil firms like Shell PLC (SHEL), BP PLC (BP) and TotalEnergies SE (TTE). IXC charges a higher 0.41% expense ratio.
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iShares MSCI Global Energy Producers ETF (FILL)
With about $84 million in assets under management (AUM), FILL is a lesser-known alternative to IXC. However, it offers a slightly different portfolio. This ETF tracks the MSCI ACWI Select Energy Producers Investable Market Index, which focuses primarily on energy producers in oil and gas along with coal miners. The portfolio is fairly diversified, with 191 holdings, and it charges a 0.39% expense ratio.
FILL’s portfolio holds some fairly exotic, hard-to-access energy stocks from emerging markets. For instance, it offers a 1.7% allocation to Saudi Arabian Oil Co. (2222.SR), also known as Saudi Aramco. There’s also a 0.6% allocation to PetroChina Ltd. (0857.HK). Otherwise, the top holdings for FILL are very similar to those of IXC, with all five “super majors” represented, along with a multitude of Canadian energy companies.
Invesco Energy Exploration & Production ETF (PXE)
“Investors looking for exposures to the energy sector through a systematic factor-based analysis may want to consider PXE,” says Nick Kalivas, head of factor and core equity product ETF strategy at Invesco. “PXE’s selection process leads to a portfolio of stocks based on price momentum, earnings momentum, quality, management action and value, and uses a tiered, equal-weighting methodology.”
Unlike the previous ETFs, PXE doesn’t assign higher weights to larger stocks. As a result, it’s no longer ExxonMobil and Chevron sitting in the top two holdings. Instead, the ETF emphasizes EOG Resources Inc. (EOG) and ConocoPhillips. The third-largest holding is currently Occidental Petroleum Corp. (OXY) at 5%, which Warren Buffett has been steadily accumulating shares in since early 2022.
Invesco S&P 500 Equal Weight Energy ETF (RSPG)
“By equally weighting, RSPG provides a bias toward the smaller stocks in the S&P 500 energy sector,” Kalivas notes. “It underweights the largest names in the sector like ExxonMobil, Chevron and ConocoPhillips, while the quarterly rebalancing to equal weight also provides a value tilt.” This equal-weight strategy can thus help investors avoid concentration risks in the domestic energy sector.
“Equal weighting can provide broader exposure to the energy sector and allow investors to better experience broad industry fundamentals,” Kalivas says. “Optimism over deregulation in the energy sector may also increase the profitability of smaller companies, although the price of oil remains a dominant factor.” RSPG charges a 0.4% expense ratio and pays a 2.5% 30-day SEC yield.
Global X MLP & Energy Infrastructure ETF (MLPX)
“Midstream companies like master limited partnerships (MLPs) handle the transportation of petrochemicals and natural gas and rely on long-term contracts with corporate clients in the energy industry,” says Kenny Zhu, research analyst at Global X ETFs. “MLPs pay high yields at consistent intervals thanks to their partnership structure, which allows these firms to avoid corporate-level income taxes.”
To access midstream companies, consider MLPX. This ETF holds MLPs like Energy Transfer LP (ET) and Enterprise Products Partners LP (EPD), but also incorporated pipelines like Enbridge Inc. (ENB), Kinder Morgan Inc. (KMI) and Oneok Inc. (OKE). This ETF currently pays a decent 4.3% 30-day SEC yield and charges a 0.45% expense ratio. It also does not require investors to file a Schedule K-1 tax form.
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7 Best Energy ETFs to Buy Now originally appeared on usnews.com
Update 12/18/24: This story was previously published at an earlier date and has been updated with new information.
