The Best ETF for the Energy Boom

The Best ETF for the Energy Boom

2014 was an inflection point for fossil fuels.

Fracking technology enabled supply to exceed demand, sending oil and natural gas prices tumbling.

They remained suppressed until the pandemic disrupted everything.

An initial supply glut quickly became a shortage, sending commodity prices through the roof, creating a profit bonanza for energy companies.

With higher interest rates crimping investment, many analysts expect energy prices to remain at current levels if not move higher.

Amongst financial pros, the State Street S&P Energy Select Sector XLE ETF is the top energy ETF.

But with several options available, we wanted to double check this was the best of the bunch.

Key Facts About XLE

• Net assets: $38.02 billion
• 12-month trailing yield: 0.69%
• Inception: December 16, 1998
• Expense ratio: 0.1%
• Number of holdings: 25

The XLE offers exposure to some of the largest energy producers in the world from Exxon Mobil to Phillips 66.

It’s comprised of the 25 stocks that make up the S&P Select Energy Sector Index, which includes integrated oil and gas producers, midstream players, and downstream operations.

The fund is fairly concentrated, with the top 10 holdings making up roughly three-quarters of the total weighting.

Source: ETF.Com

Performance

Total returns for the fund aren’t as high as you might expect. This is largely due to a massive drawdown during the pandemic.

Source: ETF.Com

In fact, the average return over a 10-year period is only 5.25%.

Again this is largely due to the significant hit energy companies took in the wake of the fracking boom.

Competition

Investors looking for exposure to the energy complex have several excellent choices that vary in methodology and specificity.

• SPDR S&P Oil & Gas Exploration & Production (XOP): With a focus on upstream operations, the XOP invests in companies that live and die by the price of oil and natural gas.
• VanEck Vectors Oil Services ETF (OIH): Rather than play the oil companies directly, the OIH invests in companies that provide operations, services, and equipment to those same energy companies.
• Vanguard Energy ETF (VDE): The VDE is similar to the XLE in its exposure to a broad range of energy companies. However, it holds 112 equities instead of 25 and has a more diversified market cap exposure.
• iShares U.S. Energy ETF (IYE): The IYE is very much like the VDE, just with a slightly different methodology and portfolio mix.

The OIH and XOP are a bit different in their focus. 

Between the XLE, VDE, and IYE, you get similar results. However, the IYE has a much higher expense ratio.

Our Opinion 8/10

While the XLE is a great ETF, we tend to prefer the VDE, given its higher diversification. 

However, if you want exposure in the energy space tied to larger market caps, you can’t do much better than the XLE.

We would urge caution in the near-term as commodity prices appear to be slipping. This could lead to a broader energy sector pullback. We’d wait for a clearer picture of the broader economy before diving in.