Two Energy ETFs Worth a Look

If you believe that a specific sector will outperform the market, then ETFs are the easiest, fastest, and safest ways to gain exposure. 

And while it might not beat out the returns of the top performing individual stocks in that sector, it takes a lot of the guessing out because it gives you a diversified basket of stocks. 

Energy is one of the hottest sectors in 2022—with energy stocks significantly outperforming the broader market. 

Today we’re going to look at two of the most compelling ETFs in the energy sector, compare them, and attempt to give you the verdict on which is better. 

SPDR S&P Oil & Gas Exploration & Production ETF (XOP) tries to provide exposure to the oil, gas, exploration, and production segment of the S&P TMI, which consists of the following sub-sectors Integrated Oil & Gas, Oil & Gas Exploration & Production, and Oil & Gas Refining & Marketing.

The second ETF we’ll be looking at is The Energy Select Sector SPDR Fund (XLE), which is also from State Street Global Advisors.

XLE tries to provide exposure to companies in the oil, gas, and consumable fuel, energy equipment, and services industries.

We chose these ETFs as they landed in 1st (XLE) and 3rd (XOP) respectively amongst the top energy ETF searches by financial pros.

Plus, as you’ll soon find out, they offer excellent liquidity and different ways to play the sector.

XLE vs. XOP Basics

The XLE is a broader energy sector ETF that provides exposure to upstream, midstream, and downstream operations.

Upstream operations include exploration and drilling, which is what the XOP focuses on. These stocks live and die by the price of crude oil and natural gas.

Midstream operates profit of the volume they move to market, often set up as Master Limited Partnerships (MLPs) that pay healthy dividends.

Downstream operations include refiners and gas stations. These operators benefit from the spread between crude oil and gas prices known as the ‘crack’ spread. For the most part, downstream operations like to see robust fuel demand.

XLE vs. XOP Holdings

XLE is heavily concentrated in two stocks, Exxon Mobil Corporation (XOM), and Chevron Corporation (CVX), which comprise about 44% of the ETFs weighting. On the other hand, XOP is significantly more diversified, with the highest weighted stock, Occidental Petroleum Corporation (OXY), making up just 2.36% of the ETFs weighting. 

XLE Holdings:

XOP Holdings:

XOP vs. XLE Performance

XLE is up 36.7% YTD. A $10K investment in the ETF 10 years ago would be worth $15,619 today, representing a more than 56% gain.

XOP is up 38.29% YTD. A $10K investment in the ETF 10 years ago would be worth $15,048 today, representing a gain of more than 50%.

Trading XOP vs. XLE

XOP trades approximately 7.6 million shares daily, which is relatively good from a liquidity standpoint. XLE trades approximately 33.2 million shares daily, making it one of the most actively traded ETFs in the market. You can trade options on both symbols if you want. 

Both offer weekly options, with the XLE having higher liquidity in those options.

Investing In XOP vs. XLE

Investors love ETFs that pay dividends because it gives them a chance to earn income on their investments. XOP pays its shareholders an annual dividend of $2.08 per share. XLE pays its shareholders an annual dividend of $2.80 per share.

Another consideration investors have is price. XOP is a more expensive ETF based on its share price, trading above $130 per share, while XLE is trading in the $70s. 

Whenever you invest in an ETF, you want to know the fees you’ll incur. XOP charges an expense ratio of 0.35%. While XLE charges an expense ratio of 0.10% 

Edge

• Diversification: The winner is XOP
• ETF Price: The winner is XLE because it’s priced lower
• Performance: Tie
• Expenses: The winner is XLE

Our Opinion 10/10

Both of these ETFs offer exposure to the energy sector. 

The XLE is much broader than the XOP which focuses more on exploration and drilling.

Given the shortages and supply chain issues in the global crude oil markets, we see ample demand and pricing power for crude oil operations.

We view any recession related pullbacks in crude prices as an opportunity to enter either name. Just be sure to not double your exposure unexpectedly.