If you want to invest in the energy sector, which historically has primarily included oil and gas companies, buying an energy exchange-traded fund (ETF) is an easy way to do so. An energy ETF allows you to buy a cross-section of the sector, so you can play the sector when you think it’s about to rise. An ETF also provides diversification, reducing your risk if you buy a small number of individual stocks.
Here are some of the top energy ETFs by their subsectors, with data as of April 4, 2024.
What are the main types of energy ETFs?
The energy sector is large and can be divided into subsectors depending on how the companies within it operate. So you have multiple ways to invest in the energy sector, and an energy ETF can give you exposure to many of these sectors:
- Exploration and production – This part of the industry focuses on finding, developing and producing crude oil.
- Refinement – This subsector focuses on converting crude oil into useful products such as gasoline.
- MLP – An MLP stands for a master limited partnership, and it is a special legal structure typically associated with midstream businesses such as pipelines. MLPs often pay large dividends.
- Oil equipment and services – This subsector includes companies that provide goods and services to explorers and pipeline companies.
- Crude oil – You can also invest in an ETF that tracks the daily movements of oil.
If you’re looking for other forms of energy exposure, such as innovative green companies, you can find that too. Some ETFs are focused on owning clean energy companies, including solar or wind energy companies. So you have many options when it comes to investing in energy ETFs.
Those looking for diversification across different sectors can turn to some of the best index funds.
Best Energy ETFs
1. Best Exploration and Production ETF
Energy Select Sector SPDR Fund (XLE)
This ETF aims to represent the energy sector of the Standard & Poor’s 500 index. It includes companies involved in exploration and production, such as ExxonMobil and Chevron, as well as companies with exposure to energy equipment and services.
- 5-year return (annualized): 13.7 percent
- Cost ratio: 0.09 percent
- Dividend yield: 3.1 percent
2. Best MLP ETF
Global X MLP ETF (MLPA)
This fund tracks the Solactive MLP infrastructure index, which includes master limited partnerships. Energy MLPs generally focus on moving oil or gas from one place to another via pipelines. Due to their legal structure, MLPs typically pay significant dividends.
- 5-year return (annualized): 7.6 percent
- Cost ratio: 0.45 percent
- Dividend yield: 7.1 percent
3. Best ETF for Oil Equipment and Services
VanEck Oil Services ETF (OIH)
This ETF tracks an index of US-listed companies focused on providing oil services to explorers and producers, including oil equipment, services and drilling.
- 5-year return (annualized): 1.5 percent
- Cost ratio: 0.35 percent
- Dividend yield: 1.2 percent
4. Best Crude Oil ETF
American oil (USO)
This ETF aims to track the daily price movements of light sweet crude oil delivered to Cushing, Oklahoma. However, the country does not directly hold oil, but instead uses futures to try to copy oil price movements.
- 5-year return (annualized): -4.8 percent
- Cost ratio: 0.60 percent
- Dividend yield: N/A
5. Best ETF for Clean Energy
iShares Global Clean Energy ETF (ICLN)
This ETF tracks an index of global stocks in the clean energy sector, including stocks that generate energy from solar, wind and other renewable sources.
- 5-year return (annualized): 8.1 percent
- Cost ratio: 0.41 percent
- Dividend yield: 1.8 percent
What to look for with an ETF
When investing in ETFs, it’s helpful to look at some aspects of each ETF so that you actually buy what you intended to buy. Here are three important things to pay attention to:
- The subsector – Each subsector may respond differently to industry conditions. For example, rising oil prices can help explorers – who sell oil – much more than midstream companies, many of which only move oil for a fixed fee. So you need to know what kind of businesses you want to own.
- The investment track record – You also want to know the track record of the ETF. Has it outperformed the sector, or underperformed during a period of strong growth? The track record can give you an idea of what to expect from the ETF. But energy companies are volatile and may not show good long-term results.
- The expense ratio – Pay attention to the expense ratio, which tells you how much it costs annually to own the fund, as a percentage of your total investment in it.
Finally, it’s worth noting that larger ETFs tend to have lower expense ratios because they can spread the costs of running the fund over more assets. So the cheapest funds can often be the largest funds, and a low expense ratio is an important measure of what makes a top ETF.
How to invest in oil and energy ETFs
An ETF can make it easier to invest in the oil sector, but due to the volatile nature of oil prices and sector dynamics, you still need to know what you want to invest in. Some sectors may perform well while others perform poorly. , and others may be somewhat resistant to volatility due to the more stable nature of their businesses.
The ETFs mentioned above give you a liquid way to invest in the energy sector, but how you invest in them is ultimately up to you. For example, some investors bet more directly on the price of oil, while others like to invest in exploration and production companies because their profits will typically rise faster when oil prices rise than the price of oil itself.
Other investors prefer the large dividends common to energy MLPs, which can often be more stable than other subsectors. But even there, the companies have big differences in business models, making them more volatile, so it’s important to know what you’re buying.
It is also important to know why you are buying energy companies. Are you just doing this to cover other positions? For example, you can buy an energy ETF to help offset the effect of rising oil prices on your other investments. Or do you expect that investing in an energy ETF will always yield a return? This can also determine which type of ETF you buy.
In short
Investors looking for exposure to the energy sector have several options for playing the sector. So it is important that they know what they are doing and what returns and risks each ETF ultimately offers. For this reason, some investors stick with broadly diversified basic index funds, such as those based on the Standard & Poor’s 500 index, and leave the trading to the professionals.
Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making any investment decision. In addition, investors are advised that the past performance of investment products does not guarantee future price increases.
