If you are considering investing in the energy sector, which has traditionally been dominated by oil and gas companies, purchasing an energy exchange-traded fund (ETF) can be a simple way to gain exposure. By investing in an energy ETF, you can access a diverse range of companies within the industry, allowing you to capitalize on sector-wide rallies. Additionally, an ETF provides the benefit of diversification, reducing your risk compared to investing in individual stocks.
Here is a breakdown of some top energy ETFs categorized by sub-sectors, with data accurate as of Sept. 16, 2024.
Types of Energy ETFs
The energy sector is vast and can be segmented into various sub-sectors based on the operations of the companies within it. Investing in an energy ETF can provide exposure to different sectors of the industry:
- Exploration and Production – Companies focused on finding, developing, and producing crude oil.
- Refining – Companies involved in refining crude oil into products like gasoline.
- MLP – Master Limited Partnerships associated with midstream companies such as pipelines, known for high dividend payouts.
- Oil Equipment and Services – Companies supplying goods and services to explorers and pipeline companies.
- Crude Oil – ETFs tracking daily movements of petroleum prices.
For investors seeking exposure to innovative green energy companies, there are ETFs focused on clean energy sectors, including solar and wind energy companies. This provides a range of options for investing in energy ETFs.
Investors looking for diversified exposure across industries can explore some of the best index funds.
Top Energy ETFs
1. Best Exploration and Production ETF
Energy Select Sector SPDR Fund (XLE)
This ETF aims to represent the energy sector of the S&P 500 index, including companies involved in exploration and production like ExxonMobil and Chevron, as well as those related to energy equipment and services.
- 5-year returns (annualized): 15.4%
- Expense ratio: 0.09%
- Dividend yield: 3.2%
2. Best MLP ETF
Global X MLP ETF (MLPA)
This ETF tracks the Solactive MLP Infrastructure Index, focusing on master limited partnerships involved in oil and gas transportation via pipelines, known for significant dividend payouts.
- 5-year returns (annualized): 8.8%
- Expense ratio: 0.45%
- Dividend yield: 7.4%
3. Best Oil Equipment and Services ETF
VanEck Oil Services ETF (OIH)
This ETF tracks a U.S.-listed companies index providing oil services to explorers and producers, including equipment, services, and drilling.
- 5-year returns (annualized): 6.8%
- Expense ratio: 0.35%
- Dividend yield: 1.4%
4. Best Crude Oil ETF
United States Oil (USO)
This ETF aims to mirror the daily price movements of light sweet crude delivered to Cushing, Oklahoma, utilizing futures to track oil price changes.
- 5-year returns (annualized): -4.1%
- Expense ratio: 0.7%
- Dividend yield: N/A
5. Best Clean Energy ETF
iShares Global Clean Energy ETF (ICLN)
This ETF tracks a global stocks index in the clean energy sector, focusing on companies generating energy from renewable sources like solar and wind.
- 5-year returns (annualized): 6.7%
- Expense ratio: 0.41%
- Dividend yield: 1.5%
Key Considerations for ETF Investment
When investing in ETFs, it is essential to consider certain factors to ensure you are making informed decisions. Here are three crucial aspects to look at:
- Sub-sector Specifics – Different sub-sectors may respond differently to industry conditions, so understanding the type of companies you want to invest in is crucial.
- Investment Track Record – Evaluating the ETF’s performance history can provide insights into its potential returns and risks.
- Expense Ratio – Pay attention to the expense ratio, as lower costs can impact your overall investment returns.
Notably, larger ETFs often have lower expense ratios due to their size, making them more cost-effective. A low expense ratio is a significant factor in determining a top-performing ETF.
Investing in Oil and Energy ETFs
While ETFs offer an accessible way to invest in the energy sector, understanding the volatile nature of oil prices and industry dynamics is crucial. Different sectors within the industry may perform differently, and it’s essential to align your investment strategy accordingly.
The ETF options provided offer a liquid avenue to invest in the energy sector, giving you the flexibility to tailor your investment approach. Whether you prefer direct exposure to oil prices or investing in specific energy companies, understanding your investment goals is key.
Consider the reasons behind your energy investments, whether it’s for portfolio diversification, hedging against oil price fluctuations, or seeking consistent returns. Your investment strategy will dictate the type of energy ETF that aligns with your objectives.
Final Thoughts
Investors seeking exposure to the energy industry have a range of options available to capitalize on sector opportunities. Understanding the nuances of each ETF and the associated risks and returns is essential for making informed investment decisions. Some investors opt for diversified index funds, while others prefer actively managing their energy investments. Conducting thorough research and staying informed are key to successful energy ETF investments.
Bankrate’s Rachel Christian contributed to the update of this article.
Editorial Disclaimer: Investors are encouraged to conduct independent research on investment strategies before making decisions. Past performance of investment products does not guarantee future price appreciation.