Energy is the backbone of modern innovation and global economic growth. Without the massive production of energy, breakthrough technologies like artificial intelligence and Bitcoin would not be possible. However, the significance of energy production extends far beyond technological advancements. Energy-rich nations hold immense sway within the global economy, with the power to influence markets and foster unmatched growth potential.
While the day may come when nuclear fusion unlocks cheap, limitless energy for all, we are not there yet. For now, energy remains one of the world’s most critical assets, and prudent investors would do well to consider exposure to companies at the forefront of energy production. As energy markets fluctuate and global demands rise, the time is ripe to explore investment opportunities in companies that power our world.
Why Now Is a Strategic Time to Invest in Energy ETFs
The energy sector is more relevant than ever, driven by global trends such as increasing demand for oil and gas, the transition to renewable energy, and geopolitical influences. Rising energy prices and supply chain challenges have only intensified the focus on energy companies, making this sector a vital component of a well-diversified portfolio.
Investing in energy-focused ETFs offers several benefits:
- Inflation Hedge: Energy assets, especially oil and gas, often outperform during inflationary periods, protecting investors against rising costs.
- Global Energy Transition: While traditional fossil fuels remain essential, the shift toward renewable energy sources presents new growth opportunities, and some ETFs cover both ends of this spectrum.
- Volatility and Long-Term Potential: The energy sector can be volatile, but this volatility also presents opportunities for outsized returns over the long term, especially as the world grapples with how to sustainably meet growing energy demands.
These factors combine to make energy ETFs compelling for investors seeking stability and growth in an ever-evolving global energy landscape. With that in mind, we have listed 5 of the top Energy-focused ETFs built to provide investors with exposure to companies that excel in these areas.
Energy Focused Exchange Traded Funds (ETFs)
*Note: Metrics are provided in USD and were accurate at the time of writing.*
1. The Energy Select Sector SPDR Fund
The Energy Select Sector SPDR Fund (XLE) is the largest and most liquid energy ETF, offering investors broad exposure to the U.S. energy sector. It tracks the Energy Select Sector Index, which holds large-cap U.S. energy companies across various sub-sectors, including oil, gas, and equipment services. XLE is a suitable choice for those seeking a core energy holding in their portfolio.
Key holdings of this fund include the following companies,
- Exxon Mobil Corp (XOM)
- Chevron Corp (CVX)
- EOG Resources Inc. (EOG)
- Schlumberger Ltd. (SLB)
- ConocoPhillips (COP)
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| Net Assets of Fund | Expense Ratio | 1-yr Return | 3-yr Return | 5-yr Return |
| ~$35.77 Billion | 0.09% | 16.12% | 23.95% | 12.92% |
XLE is managed by State Street Global Advisors, a leader in index investing. The fund tracks the Energy Select Sector Index, ensuring broad exposure to large-cap U.S. energy companies and providing investors a benchmark-driven investment in this established sector.
What sets it apart from direct competitors?
- Unrivaled Liquidity and Stability: XLE’s massive size and focus on large-cap companies make it a highly liquid and relatively stable option for investors seeking broad energy exposure.
- Benchmark Representation: As the ETF tracking the Energy Select Sector Index, XLE offers investors a direct way to mirror the performance of major U.S. energy companies.
XLE was launched in December 1998 and is unique in its unmatched liquidity and pure large-cap focus, offering investors a stable and accessible way to invest in major U.S. energy companies.
The Vanguard Energy ETF (VDE) is a low-cost option from Vanguard, providing diversified exposure to the U.S. energy market. It tracks the MSCI US Investable Market Energy 25/50 Index, encompassing a broad range of U.S. energy companies, including large, mid, and small-cap stocks. VDE is ideal for investors who want a cost-efficient and comprehensive way to invest in the energy sector.
Key holdings of this fund include the following companies,
- Exxon Mobil Corp (XOM)
- Chevron Corp (CVX)
- ConocoPhillips (COP)
- EOG Resources Inc. (EOG)
- Schlumberger Ltd. (SLB)
| Net Assets of Fund | Expense Ratio | 1-yr Return | 3-yr Return | 5-yr Return |
| ~$10.1 billion | 0.10% | 5.40% | 28.09% | 15.52% |
VDE is managed by Vanguard, renowned for its low-cost index funds. The fund tracks the MSCI US Investable Market Energy 25/50 Index, encompassing a diverse range of U.S. energy companies, offering investors diversified and cost-efficient exposure to the energy sector.
What sets it apart from direct competitors?
- Cost-Efficiency Champion: VDE’s exceptionally low expense ratio makes it an attractive choice for cost-conscious investors seeking long-term growth in the energy sector.
- Growth Potential with Mid- and Small-Caps: Unlike many competitors, VDE includes mid- and small-cap companies, providing the potential for higher returns, albeit with increased volatility.
VDE was launched in September 2004 and is unique in its ultra-low expense ratio and inclusion of mid- and small-cap energy companies, providing investors a cost-effective way to access diversified exposure to the U.S. energy market, including potential high-growth opportunities.
3. iShares U.S. Energy ETF
The iShares U.S. Energy ETF (IYE) is a popular choice from iShares, focusing on U.S. oil and gas companies, particularly those involved in exploration and production. It tracks the Dow Jones U.S. Oil & Gas Index, offering targeted exposure to the upstream segment of the energy sector. IYE is well-suited for investors who are bullish on oil and gas prices and the companies involved in their extraction.
Key holdings of this fund include the following companies,
- Exxon Mobil Corp (XOM)
- Chevron Corp (CVX)
- ConocoPhillips (COP)
- EOG Resources Inc. (EOG)
- Schlumberger Ltd. (SLB)
| Net Assets of Fund | Expense Ratio | 1-yr Return | 3-yr Return | 5-yr Return |
| ~$1.23 billion | 0.39% | 15.16% | 22.17% | 11.55% |
IYE is managed by BlackRock, the world’s largest asset manager. The fund tracks the Dow Jones U.S. Oil & Gas Index, targeting companies involved in oil and gas exploration and production, providing investors a specialized investment option in this crucial segment of the energy sector.
What sets it apart from direct competitors?
- Upstream Oil & Gas Focus: IYE’s dedicated focus on exploration and production companies makes it a powerful tool for investors seeking direct exposure to the core of the oil and gas industry.
- Oil Price Leverage: IYE’s composition makes it particularly sensitive to fluctuations in oil and gas prices, offering potential for amplified gains (or losses) in response to commodity market movements.
IYE was launched in May 2000 and is unique in its targeted focus on U.S. oil and gas exploration and production companies, offering investors a way to capitalize on the potential gains from rising oil and gas prices.
The SPDR S&P Oil & Gas Exploration & Production ETF (XOP) provides even more concentrated exposure to the upstream energy segment than IYE. It focuses exclusively on U.S. oil and gas exploration and production companies, tracking the S&P Oil & Gas Exploration & Production Select Industry Index. XOP is attractive for investors seeking leveraged gains from rising oil and gas prices.
Key holdings of this fund include the following companies,
- CNX Resources Corp.
- Texas Pacific Land Corp.
- Southwestern Energy Co.
- Chesapeake Energy Corp.
- Marathon Oil Corp.
| Net Assets of Fund | Expense Ratio | 1-yr Return | 3-yr Return | 5-yr Return |
| ~$2.84 billion | 0.35% | -4.00% | 21.96% | 12.75% |
XOP is managed by State Street Global Advisors. The fund tracks the S&P Oil & Gas Exploration & Production Select Industry Index, focusing exclusively on upstream oil and gas companies, offering investors a concentrated investment in this specific segment of the energy market.
What sets it apart from direct competitors?
- Pure-Play Upstream Investment: XOP takes upstream focus to the next level, exclusively holding companies engaged in oil and gas exploration and production, making it a highly targeted investment option.
- Equal-Weighting for Potential Outperformance: By equally weighting its holdings, XOP allows smaller companies to have a greater impact on performance, offering the potential for outsized gains compared to market-cap weighted funds.
XOP was launched in January 2006 and is unique in its pure-play exposure to upstream oil and gas companies and its equal-weight methodology, providing investors a leveraged play on the exploration and production segment with potential for enhanced returns from smaller companies.
5. First Trust Natural Gas ETF
The First Trust Natural Gas ETF (FCG) offers targeted exposure to the natural gas sector. It focuses on companies involved in natural gas production, transportation, and distribution, tracking the ISE-Revere Natural Gas Index. FCG is suitable for investors who are optimistic about the growth of natural gas demand and infrastructure development.
Key holdings of this fund include the following companies,
- Western Midstream Partners LP (WES)
- Hess Midstream LP (HESM)
- ConocoPhillips (COP)
- EOG Resources, Inc. (EOG)
- EQT Corporation (EQT)
| Net Assets of Fund | Expense Ratio | 1-yr Return | 3-yr Return | 5-yr Return |
| ~$352.39 million | 0.60% | -1.64% | 25.73% | 21.62% |
FCG is managed by First Trust Advisors, known for its sector-specific ETFs. The fund tracks the ISE-Revere Natural Gas Index, targeting companies across the natural gas value chain, providing investors a specialized investment option to participate in the growth and development of the natural gas industry.
What sets it apart from direct competitors?
- Dedicated Natural Gas Exposure: FCG’s exclusive focus on natural gas sets it apart, offering targeted exposure to a growing segment of the energy market with potentially significant long-term growth prospects.
- Full Value Chain Representation: By including companies involved in production, transportation, and distribution, FCG provides a comprehensive view of the natural gas industry, capturing value across the entire supply chain.
FCG was launched in April 2007 and is unique in its exclusive focus on the natural gas sector, including companies involved in production, transportation, and distribution, offering investors a specialized investment option to capitalize on the growth and infrastructure development in the natural gas industry.
Final Thoughts on Energy ETFs
Overall, the energy sector provides diverse investment avenues, with ETFs catering to different strategies. For broad exposure, XLE and VDE offer stability and growth potential, respectively. IYE and XOP focus on oil and gas, with the latter providing a more concentrated approach. FCG is ideal for those bullish on natural gas. As always, due diligence is crucial, as the energy sector’s inherent volatility requires careful consideration of individual goals and risk tolerance.
Make sure to visit our look at the top online brokers that can help you invest and gain exposure to what may be lucrative opportunities.
