What Is an Energy ETF?
The term energy ETF refers to an exchange-traded fund that provides investors with exposure to the energy sector. Like other exchange-traded funds, energy ETFs track a broad sector index, sub-sector, commodity, or other assets by investing in oil, gas, and alternative energy companies.
Investing in energy ETFs allows investors to diversify their risk by giving them access to a broad range of investments without having to choose individual companies or sectors. Energy ETF shares can be purchased on an exchange just like stocks. Unlike mutual funds, there are no loads and the fees associated with ETFs are generally lower.
- An energy ETF is an exchange-traded fund that exposes investors to the energy sector.
- They track a broad sector index, sub-sector, commodity, or asset.
- Energy ETFs invest in oil, gas, and alternative energy companies.
- Investing in energy ETFs allows you to diversify your portfolio and reduce your risk.
- Do your research first, then open a brokerage account to begin trading shares in energy ETFs.
Understanding Energy ETFs
Exchange-traded funds have been around since the 1990s and have become a popular investment choice for individuals who want to diversify their portfolios and cut back on risk. Just like mutual funds, ETFs provide investors with exposure to a basket of securities that track an underlying index, commodity, sub-sector, or asset.
ETFs function just like stocks—they trade on stock exchanges, which means shares are available for purchase through a brokerage account. Like mutual funds, they can be both actively and passively managed. The former comes with higher fees while the costs associated with passively-managed ETFs are lower.
The energy sector represents a significant part of the global economy and touches virtually every business. Nearly all investors with balanced portfolios already have some exposure to energy companies. Energy's heavy representation in the broad market averages like the S&P 500 is evidence of its importance.
As noted above, energy ETFs are baskets of securities that allow investors to access the energy sector without having to choose individual companies. Energy ETFs invest in oil, gas, and alternative energy companies, including those involved in the exploration, production, distribution, transportation, and manufacturing of energy and related products.
The year the world's very first ETF (Toronto 35 Index Participation Units) was launched, which traded on the Toronto Stock Exchange (TSX). The first ETF was introduced in the United States in 1993.
Specialized Energy ETFs
Specialized energy ETFs cover a wide range of business types, regions, and risk profiles. There are choices for both conservative and aggressive investors. The sector encompasses a highly complex and sophisticated network of companies involved in the production and distribution of the energy needed to power everyday life and routine business.
Supply and demand for global energy is an outsized factor in sector performance but the demand is not static. Oil and gas producers typically outperform when oil and gas prices are high, and earn less when the value of the commodity declines. But when crude prices drop, oil refiners can benefit from the falling cost of feedstock to produce petroleum products like gasoline.
As an investor in the energy sector, keep in mind that it is unusually sensitive to politics, which often drives changes in oil prices.
Benefits of Investing in Energy ETFs
There are many different reasons why you'd want to invest in energy ETFs. As a basket of energy securities, it gives you access to a diverse range of companies in which to invest without having to choose them yourself. This can help you cut down on some of the risks associated with investing in the energy sector, such as market risk, commodity price risk, and geopolitical risk.
You can also choose specialized ETFs that cater to your investment goals and personal needs. For instance, if you prefer investing in new forms of energy, ETFs give you the option of choosing clean energy ETFs while avoiding traditional energy companies that deal with oil, gas, and coal.
Keep in mind that even though energy ETFs help you diversify your portfolio, it's important that you invest in many industries, sectors, and companies to make sure you meet your investment goals.
How to Invest in Energy ETFs
There are 54 energy ETFs that trade on the U.S. markets with a total of $92.83 billion in assets under management (AUM), according to ETF.com. The average expense ratio for these ETFs was reported to be 0.67%.
ETFs provide diversification but there are risks to consider. Any specialized sector-based ETF like ones that track energy stocks can add volatility to a portfolio, so it's important to do your research before you make any investment decisions. Reviewing the prospectus is a prudent move for any investor, especially when considering volatile commodities like energy. This will give you a good idea about any associated fees and the securities you're exposed to within the ETF.
Once you're ready, all you have to do is open up a brokerage account and start trading. Fund your brokerage account and begin purchasing shares—the same way you would with traditional stocks.
The Energy Select Sector SPDR Fund (XLE) is the largest energy ETF. The fund is managed by State Street Global Advisors. As of June 9, 2022, the ETF had $44.7 billion in AUM and a gross expense ratio of 0.10%. Its goal is to provide investors with an "effective representation of the energy sector of the S&P 500 Index."
The following are some of the other popular energy ETFs available on the market:
|ETF Name||Ticker Symbol||Assets Under Management||Expense Ratio||Benchmark Index|
|iShares Global Energy ETF||IXC||$1.6 billion||0.43%||S&P Global 1200 Energy Sector Index|
|Vanguard Energy ETF||VDE||$7 billion||0.10%||Spliced US IMI Energy 25/50|
|Fidelity MSCI Energy ETF||FENY||$1 billion||0.08%||MSCI US IMI Energy 25/50|
|Global X MSCI China Energy ETF||CHIE||$8.2 million||0.66%||MSCI China Energy IMI Plus 10/50 Index|
|Invesco Solar ETF||TAN||$2.7 billion||0.69%||MAC Global Solar Energy Index|
Are ETFs riskier than stocks?
Just like any other investment, there are inherent risks associated with ETFs, such as sector, commodity, and geopolitical risks. But unlike stocks, the risk is spread out because, as a basket of securities, an ETF acts like a mini portfolio. Losses from one company are offset in the ETF's portfolio by gains made by another. This doesn't always happen when you invest solely in a handful of stocks.
Will I receive dividends from an ETF?
Dividends are treated two different ways by ETFs. Some reinvest the dividends paid out by companies in their portfolios back into the funds. Others pay them out directly to shareholders. In this case, payouts are considered to be dividends from the ETF—not the companies that issue them. As such, they're disbursed from the fund's total assets.
What is the best performing energy ETF?
The best performing energy ETF (and the best performing ETF overall) was SPDR S&P Oil & Gas Exploration & Production ETF (XOP). The fund had $5.8 billion in assets under management with an expense ratio of 0.35%. XOP had a year-to-date return of 61.8% as of June 9, 2022.
Are renewable energy ETFs a good investment?
The renewable energy sector is a sector that many believe shows promise. That's because clean energy technologies are some of the fastest-growing technologies in the world today. As such, governments invest in clean and renewable energy sources and technology. But whether renewable energy ETFs are good investments depends on your personal beliefs and investment goals.
Vanguard. "History of ETFs."
ETF.com. "Energy ETF Overview."
State Street Global Advisors. "The Energy Select Sector SPDR® Fund."
State Street Global Advisors. "SPDR® S&P® Oil & Gas Exploration & Production ETF." Accessed Dec. 30, 2021.