Oil prices started to recover in the fourth quarter of 2017 after spending the better part of two years in the wilderness. Driven by President Trump’s efforts to sanction Iran’s crude exports, along with supply cuts by the Organization of the Petroleum Exporting Countries (OPEC) and continuing geopolitical uncertainty in Venezuela, black gold has continued its rally into the second quarter of 2018. 

As the energy sector continues to outperform, investors who are looking for a longer-term play should consider increasing their exposure to energy equipment and services companies. According to Credit Suisse AG (NYSE: CS), oil exploration and production spending is set to increase by around 12% in 2018. The investment bank also expects well completion rates to remain robust throughout 2019 and 2020, forecasting 9% and 8% respectively.  (See also: Top 4 Oil Stocks for May 2018.)

These three exchange-traded funds (ETFs) provide a cost-effective way for investors to take advantage of stocks that operate in this niche energy subsector.

VanEck Vectors Oil Services ETF

Created in 2011, the VanEck Vectors Oil Services ETF (NYSEARCA: OIH) aims to track the performance of the MVIS U.S. Listed Oil Services 25 Index by investing a minimum of 80% of its assets in securities that comprise the benchmark. These securities include common stocks and depository receipts of small- to medium-cap U.S. exchange-listed companies in the oil services sector. The fund’s top two holdings, Schlumberger NV (NYSE: SLB) and Halliburton Co. (NYSE: HAL), account for roughly 33% of its portfolio, which although high, match the benchmark's weighting.

The VanEck Vectors Oil Services ETF is the largest fund in the equipment and services subsector, with $1.72 billion in assets under management (AUM) as of May 2018. It has a low expense ratio of 0.35%, compared to 0.47% for the category average, and pays a dividend of 2.5%. While Morningstar has given the fund an above-average risk rating by Morningstar, investors have been well-compensated for their risk. The fund’s year-to-date (YTD) return as of May 2018 is an impressive 12.4%.

SPDR S&P Oil & Gas Equipment & Services ETF

The SPDR S&P Oil & Gas Equipment & Services ETF (NYSEARCA: XES) launched in 2006 and seeks to replicate the performance of S&P Oil & Gas Equipment & Services Select Industry Index. The benchmarked index represents the oil and gas equipment and services component of the Standard & Poor’s Total Market Index (S&P TMI). Major holdings include Ensco PLC Class A (NYSE: ESV) at 3.9%, Oil States International, Inc. (NYSE: OIS) at 3.86% and Transocean Ltd. (NYSE: RIG) at 3.8%. The ETF's portfolio consists of 39 stocks and has an annual turnover rate of 34%.

The SPDR S&P Oil & Gas Equipment & Services ETF is much smaller than OIH, with $433 million in net assets. As of May 2018, the fund has a three-year annualized return of -12.15% but has returned 9.7% YTD. It has an expense ratio of 0.35% and pays investors a 12-month dividend yield of 1.7%.

iShares U.S. Oil Equipment & Services ETF

Launched in 2006, the iShares U.S. Oil Equipment & Services ETF (NYSEARCA: IEZ) attempts to mirror the performance of the Dow Jones U.S. Select Oil Equipment & Services Index. This fund invests the lion’s share of its $254.8 million net assets, as of May 2018, in stocks that comprise the underlying index. The ETF's holdings are concentrated among its top five holdings, which represent over 40% of the portfolio. Key holdings include Schlumberger Ltd., Halliburton Co. and National Oilwell Varco Inc. (NYSE: NOV).

The iShares U.S. Oil Equipment & Services ETF offers a healthy dividend yield of 3.37%, but has the highest expense ratio of the three ETFs discussed at 0.44%. This higher-risk-rated fund has five- and three-year annualized returns of -6.02% and -6.46%, respectively. However, it has performed well over the past year, returning 11.92% as of May 2018. (See also: The 3 Largest Oil ETFs/ETNs)