Each of the five Exchange Traded Funds in our top picks of the year outperformed the broader U.S. equity market as measured by the S&P 500, whose total return over the same period was 23.5%. The top-performing ETF of 2021 was the SPDR S&P Oil & Gas Exploration & Production ETF (XOP), with a total return of 67.1% YTD.
The major theme that has driven the performance of the top five ETFs is this year's boom in certain commodities, especially oil and natural gas. Commodity prices across the board have been driven up by supply-chain issues, but two factors, in particular, have caused the spike in energy prices. The first is that the global economy has been recovering from the economic shock of the onset of the COVID-19 pandemic in 2020. The second is the relatively slow pace at which the Organization of the Petroleum Exporting Countries (OPEC) has raised oil production since its mid-2020 supply cut.
Rallying oil and gas prices renewed investor optimism for stocks in the energy sector. Energy stocks had been shunned in 2020 as low energy prices weighed on their top and bottom lines, but both have strengthened this year. As such, four of the top five ETFs are oil and gas stock ETFs benefitting from renewed optimism in the energy sector.
The last of the top five ETFs also benefited from rising commodities prices, specifically the boom in lithium prices. Lithium is a key metal used in producing the batteries used in many electric devices, but are used in especially large quantities to power electric vehicles (EVs), the sales of which have risen sharply this year.
- The top ETF of 2021 was XOP with a year-to-date total return of 67.1% through Dec. 2, 2021.
- XOP is an oil and gas exploration and production fund.
- Over the same period, the S&P 500 returned 23.5%.
- This year's economic rebound has driven a boom in the prices of oil, natural gas, and lithium, boosting the ETFs that hold stocks of companies that extract and refine these commodities.
The top five exchange-traded funds (ETFs) of 2021 were selected from the broad spectrum of ETFs traded on U.S. markets found on the website ETF Database. Inverse and leveraged ETFs were excluded from the selection process, as were ETFs with less than $2 billion in assets under management (AUM). The top five were then selected from the remaining group of ETFs based on their year-to-date (YTD) total return as of the close of markets on Dec. 2, 2021.
- Year-to-Date Return: 67.1%
- Fund Description: Oil and Gas Exploration and Production Fund
- Expense Ratio: 0.35%
- Inception Date: June 19, 2006
- Issuer: State Street
XOP tracks the performance of the S&P Oil & Gas Exploration & Production Select Industry Index, which represents the oil and gas exploration and production (E&P) segment of the S&P Total Market Index. The ETF provides exposure to companies engaged in the exploration, production, refining, and marketing of oil and gas.
However, more than two-thirds of the fund's holdings are of companies engaged in exploration and production. It follows a blended strategy, investing in both value and growth stocks across the market cap spectrum. Its top three holdings include Devon Energy Corp. (DVN), Callon Petroleum Co. (CPE), and SM Energy Co. (SM), all three of which are engaged in the exploration and production of oil and gas.
XOP has been riding the wave of investor optimism over energy companies this year amid the rally in oil prices. Another key factor luring investors to the sector is that a number of oil and gas exploration and production companies are coming out of the pandemic with record cash flows, which the companies say they are going to return to shareholders rather than spend on growth. That marks a major shift compared to prior years when further expansion was given priority over investor returns.
The cautiousness of energy companies about investing in future expansion could also hold back the rate of increase in oil supply, which could continue to maintain the strength in prices.
- Year-to-Date Return: 54.4%
- Fund Description: Large-Cap Oil and Gas Fund
- Expense Ratio: 0.10%
- Inception Date: Sept. 23, 2004
- Issuer: Vanguard
VDE seeks to track the performance of the MSCI U.S. Investable Market Energy 25/50 Index, a benchmark of energy stocks with various market capitalizations. The ETF provides exposure primarily to companies operating within the oil and gas sector, including companies involved in exploration and production, storage and transportation, refining, drilling, and more. It employs a full-replication strategy whenever possible, but will use a sampling strategy when regulatory constraints prevent it from fully replicating the index.
The majority of its holdings are large-cap equities. Its top holdings include Exxon Mobil Corp. (XOM), Chevron Corp. (CVX), and ConocoPhillips (COP), all three of which are integrated oil and gas companies. VDE's strong performance this year has also been largely driven by rising oil prices fueling investor optimism over the energy sector.
- Year-to-Date Return: 53.5%
- Fund Description: Multi-Cap Oil and Gas Fund
- Expense Ratio: 0.41%
- Inception Date: June 12, 2000
- Issuer: BlackRock
IYE aims to gauge the performance of the Russell 1000 Energy RIC 22.5/45 Capped Gross Index, an index composed of U.S. equities within the energy sector. The ETF provides exposure to U.S. companies engaged in the exploration, production, storage, transportation, and refining of oil and gas, as well as companies that provide oil and gas equipment and services.
The multi-cap fund is primarily focused on value stocks. Its holdings are concentrated on a small group of companies, with its top three holdings accounting for nearly half of its total AUM. Thus, it may be too targeted for investors with a long time horizon, but could be useful as a sector rotation strategy or as a way to overweight a specific corner of the energy sector. IYE's top holdings include Exxon Mobil, Chevron, and ConocoPhillips.
The fund is another energy ETF that has benefitted from the strong rally in oil prices and rebound in cash flows of energy companies this year.
- Year-to-Date Return: 51.5%
- Fund Description: Large-Cap Oil and Gas Fund
- Expense Ratio: 0.12%
- Inception Date: Dec. 16, 1998
- Issuer: State Street
XLE holds stock in companies primarily engaged in the development and production of crude oil and natural gas, and the provision of drilling and other energy-related services. The ETF provides exposure to the U.S. energy industry by tracking the Energy Select Sector Index which is meant to be representative of the energy sector of the S&P 500.
The fund is heavily concentrated with a few stocks comprising a large percentage of the portfolio, with its top two holdings accounting for over 40% of its AUM. It is best used as a tactical play for gaining exposure to the energy sector when oil prices are rising, but may not be ideal as part of a long-term, buy-and-hold strategy. The fund's top three holdings include Exxon Mobil, Chevron, and EOG Resources (EOG).
Like the other three oil and gas ETFs above, XLE's performance has largely been a result of investor optimism over the energy sector amid fast-rising oil prices and improvements in the financial performance of oil and gas companies.
- Year-to-Date Return: 48.5%
- Fund Description: Lithium Mining and Lithium Battery Fund
- Expense Ratio: 0.75%
- Inception Date: July 22, 2010
- Issuer: Mirae Asset Global Investments
LIT aims to track the Solactive Global Lithium Index, which gauges the performance of the largest and most liquid companies engaged in the mining of lithium or in the production of lithium batteries. The ETF provides broad exposure to the lithium industry, including companies that mine and refine the metal as well as those involved in battery production.
The majority of the fund's assets are allocated toward the materials sector, followed by information technology and industrials. Companies based in China receive the largest geographic allocation, followed by the U.S., South Korea, and a number of other developed economies.
The fund is focused on micro-cap companies and follows a blended strategy of investing in both value and growth stocks. Its top three holdings include Albemarle Corp. (ALB), a global manufacturer of specialty chemicals; class A shares of EVE Energy Co. Ltd. (SHE:300014), a China-based manufacturer of lithium batteries; and TDK Corp. (TKS: 6762), an electronics company based in Tokyo.
Lithium is an essential metal used in the production of rechargeable batteries that power EVs. Demand for the metal has surged as sales of EVs have increased in 2021. The current U.S. government has been pushing for EV production as a way to fight climate change, with President Joe Biden saying in August 2021 that he wants EV sales to make up 50% of all new vehicle sales by 2030.
Bullish forecasts for future lithium demand are also helping to fuel investor optimism. IHS Markit says that it expects the lithium market to more than double by 2025 from levels forecast for 2021, according to the Wall Street Journal.
The Bottom Line
The top-performing ETF by year-to-date total return through Dec. 2, 2021, is the SPDR S&P Oil & Gas Exploration & Production ETF (XOP). XOP and the next three top ETFs on the list are all funds focused on oil and gas companies, whose financial fortunes have rebounded amid rallying oil prices fueled by a global economy recovering from last year's pandemic-induced shock.
But it's not just oil prices that are rising. As EV sales rise and vie to replace gas-powered cars on the road, the price of lithium, a key component of rechargeable batteries, has risen as well, giving the fifth spot on the list to an ETF focused on lithium mining and battery production.