What is the 'Energy Sector'

The energy sector is a category of stocks that relate to producing or supplying energy. This sector includes companies involved in the exploration and development of oil or gas reserves, oil and gas drilling and refining, or integrated power utility companies including renewable energy and coal.

BREAKING DOWN 'Energy Sector'

​The energy sector is a large and all encompassing term that describes a complex and inter-related network of companies directly and indirectly involved in the production and distribution of energy needed to power the economy and facilitate the means of production and transportation.

Performance in the sector is largely driven by the supply and demand for worldwide energy. Oil and gas producers will do very well during times of high oil and gas prices, but will earn less when the value of the commodity drops. Oil refiners, on the other hand, benefit from the falling cost of feedstock to produce petroleum products like gasoline when crude oil prices drop. Furthermore, this sector is sensitive to political events, which historically have driven changes in the price of oil.

Some of the largest companies in the U.S. energy sector include Exxon Mobil and Chevron, both of which are large international integrated oil companies. Duke Energy Corporation is one of America's largest electricity providers as measured by number of customers, and Peabody Energy is America's largest coal producer measured by tons of output. All these companies are part of what is commonly known as the energy sector.

​Energy Sector Investment Opportunities

​There are a number of energy-related exchange traded funds (ETFs) that afford retail investors exposure to the sector. Investors can vary which part of the value chain they want exposure to with any number of funds. For example, the SPDR S&P Oil & Gas Exploration & Production ETF (XOP) gives investors exposure to the upstream oil and gas exploration companies, while the VanEck Vectors Coal ETF (KOL) gives investors access to the coal industry. Investors wanting access to alternative energy can invest in the Guggenheim Solar ETF (TAN).

There are many different ways for investors to gain exposure to the energy sector, depending on their preferences and specific views about the growth and earnings prospects across the value chain. The energy sector is bigger and more diversified than just the oil and gas industry. Many investors feel renewable and alternative energy sources will be important in the future as the popularity of electric cars grows. Traditional hydrocarbon producers seem to be falling out of favor for the time being.

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