Energy stocks and exchange-traded funds (ETFs) were a popular bet in 2022. The sector was far and away the best performer, with the Energy Select Sector SPDR Fund (XLE) delivering a massive total return (price plus dividends) of 64.2%, driving numerous attached energy ETFs higher. Compare that to a negative total return for the S&P 500 and nine of its sectors, and low-single-digit gains for the remaining one, and it's not even close.
The previous year will be (hopefully) almost impossible to replicate. Russia's war with Ukraine, higher travel demand and other drivers sent U.S. crude oil prices from around $75 at the start of 2022 to multiple peaks above $120 across the year.
Still, certain sparks – including China's reopening, continued conflict in Ukraine and more recently, news that Saudi Arabia and Russia will extend production cuts through year's end – could sustain a floor under oil prices.
Carrie King, global deputy chief investment officer at BlackRock Fundamental Equities, says among cyclical sectors, her firm favors energy (and financials) in 2023: "We see energy sector earnings easing from historically elevated levels yet holding up amid tight energy supply," she says.
While the odds are against energy repeating as the S&P leader this year, there is reason to believe energy funds still have more gas in the tank. So if you want to add exposure to the sector, here are our eight best energy ETFs to buy now.
Data is as of Sept. 6. Yields represent the trailing 12-month yield, which is a standard measure for equity funds.
Energy Select Sector SPDR Fund
- Assets under management: $39.0 billion
- Dividend yield: 3.6%
- Expenses: 0.10%, or $10 annually on a $10,000 investment
Every conversation about energy ETFs rightfully should begin with the Energy Select Sector SPDR Fund (XLE, $91.26) – the largest such exchange-traded fund on the market by a country mile. At $39 billion, XLE has roughly five times as much in assets under management than No. 2, the Vanguard Energy ETF (VDE, ~$.6 billion in AUM).
XLE, which will celebrate its 25th birthday next December, is pretty straightforward: It's a collection of the (currently 23) energy stocks found within the S&P 500. Translation: You're getting a concentrated heap of big, blue-chip, U.S.-based oil-and-gas exposure.
Concentration risk is a serious concern for many ETFs – if one or two stocks account for so much of the portfolio, how much diversification are you really getting, after all? But that's admittedly less of a concern in energy, where most stocks (large and small) ebb and flow based on the underlying commodity prices. In fact, you could argue that the heavy allocations to Exxon and Chevron act as ballast because parts of these integrated majors' businesses can still profit even when oil prices aren't rising.
Fidelity MSCI Energy ETF
- Assets under management: $1.7 billion
- Dividend yield: 3.3%
- Expenses: 0.08%
The good news: With FENY, you don't get less for your money – you get more. This Fidelity ETF tracks the MSCI USA IMI Energy Index, which results in roughly 120 holdings versus just more than 20 for the XLE.
Past that, though, you're getting a similar flavor of exposure to XLE. This is a predominantly large-cap index mixed with mid-teens exposure to mid-cap stocks. You're also getting quite a bit of Exxon and Chevron, at 21% and 14%, respectively. Other holdings include the likes of ConocoPhillips (COP, 7% weight), EOG Resources (EOG, 3.8%) and SLB (SLB, 4.2%).
The Fidelity energy ETF's fee difference versus XLE isn't massive either, at a mere 2 basis points. But you're ultimately getting a wider swath of stocks for less, which makes FENY worthy of consideration.
Invesco S&P 500 Equal Weight Energy ETF
- Assets under management: $567.9 million
- Dividend yield: 3.2%
- Expenses: 0.40%
If these massive allocations to Exxon and Chevron make you a little nervous, there's a way to get diversified energy exposure that's much more evened out.
Funds such as XLE and FENY are weighted by market cap, which means the bigger the stock, the more of it they hold in their portfolios. However, while many sector funds are weighted this way, a few aren't: including the Invesco S&P 500 Equal Weight Energy ETF (RSPG, $78.55).
Like XLE, the RSPG invests in the S&P 500 Energy Index, which means a current portfolio of the same 20 or so stocks. But instead of weighting them by market cap, RSPG starts every stock off at the same weight each quarter. The stocks might move up or down over the next three months, but regardless of how big or small they've gotten, RSPG will simply rebalance them at the same weight come the following quarter.
Right this second, then, neither Exxon or Chevron are top 10 holdings. Rather, APA Corp. (APA) and Marathon Petroleum (MPC) – which combined are worth around $74 billion, versus Chevron's $320 billion and Exxon's $458 billion – are the two top stocks, with current weightings of roughly 5% apiece.
Again, most energy stocks move along with oil and gas prices, so RSPG's performance is often similar to XLE's. Still, if you want to rest easy knowing you're not carrying any excess single-stock risk, this Invesco fund will do the trick.
iShares Global Energy ETF
- Assets under management: $1.9 billion
- Dividend yield: 4.5%
- Expenses: 0.44%
Energy inflation isn't a purely American phenomenon. The rest of the world has been suffering from higher oil and gas prices … and many international oil giants have profited along with their U.S. brethren.
The largest, most liquid fund covering a wider world of energy equities is the iShares Global Energy ETF (IXC, $41.17) – a nearly $2-billion-plus portfolio of 52 companies that dominate global energy production, refining, storage and other industries.
"Global" is the keyword here – it means the fund includes both domestic and international stocks. The official breakdown is U.S. 60%/rest of world 40%, with the U.K. (12%), Canada (11%) and France (5%) representing the top non-American country weights.
Exxon and Chevron lead the way here, at 16% and 10% weights, respectively. But you're also getting significant exposure to international energy giants including Britain's Shell (SHEL, 8%) and BP (BP, 4%) and France's TotalEnergies (TTE, 5%).
It's worth noting that in both the short- and long-term alike, U.S.-based energy stocks have outperformed their international peers. But if you're looking to defray a little geographic risk, this is one of the best energy ETFs to do so while still printing a nice profit from higher global commodity prices.
iShares Global Clean Energy ETF
- Assets under management: $3.4 billion
- Dividend yield: 1.0%
- Expenses: 0.41%
All of the best energy ETFs on this list have so far covered traditional energy – namely, oil and natural gas. But clean energy is another avenue for potential growth that investors shouldn't ignore.
In BlackRock's 2023 outlook, Hannah Johnson, portfolio manager, natural resources, for BlackRock Fundamental Equity, says "Our research suggests the global transition (to net-zero carbon emissions) could accelerate, boosted by significant climate policy action, by technological progress reducing the cost of renewable energy and by shifting societal preferences as physical damage from climate change – and its costs – become more evident."
And as far as clean energy goes, investors might want to take a global tack.
"Europe has intensified its efforts to build clean energy infrastructure as it seeks to wean itself off Russian energy. The clearest example of that is the European Commission's RePower EU Plan," Johnson adds. "Further impetus is likely to come from higher traditional energy prices, which are exacerbating the cost-of-living crisis and have shifted the economics decisively in favor of cleaner energy resources."
With both those goals in mind, investors might consider the iShares Global Clean Energy ETF (ICLN, $15.55) – a juggernaut in its own right as the largest clean-energy ETF and the fourth-largest energy ETF overall, hoovering up more than $3 billion in assets since its 2009 inception.
In lieu of traditional oil-and-gas names, ICLN is a diversified portfolio of 100 holdings across numerous industries, including semiconductors and semiconductor equipment (26%), electric utilities (21%), renewable electricity (22%), heavy electrical equipment (8%) and others that produce or otherwise provide technology or infrastructure for cleaner energy.
Individual green energy stocks include the likes of California-based residential and commercial solar firm Enphase Energy (ENPH), Spanish multinational electric utility Iberdrola (IBDRY) and Danish wind turbine manufacturer Vestas Wind Systems (VWDRY).
Green energy and traditional energy often move in different directions, and indeed, ICLN ended 2022 down 5.4% while oil and gas were off to the races. So far this year, the fund is off 21%. But the decision by Saudi Arabia and Russia to continue with output cuts could spur further investment in cleaner technologies, setting energy ETFs like ICLN up for more fruitful returns in the coming months.
(Note: If you're looking for a strong U.S.-specific clean-energy ETF, consider the SPDR S&P Kensho Clean Power ETF (CNRG), which charges 0.45%, has a 5-star Morningstar rating and has a Bronze Morningstar analyst rating.)
SmartETFs Sustainable Energy II ETF
- Assets under management: $5.0 million
- Dividend yield: 0.3%
- Expenses: 0.79%
SOLR, which is actively managed and fully transparent, is an equally weighted fund with 30 positions. While the ticker would seem to indicate a solar tilt, it generally invests "in companies poised to benefit from the shift to sustainable energy," whether that's actually producing alternative or renewable sources of energy, or otherwise making these kinds of energy more efficient and/or accessible.
Top holdings include some of the stocks mentioned in ICLN, such as Iberdrola and Enphase. At No. 1 currently is American power management company Eaton (ETN), with chipmaker ON Semiconductor (ON) in at a close second.
SOLR is both young and small – it went live Nov. 11, 2020, and has since only cobbled together $5 million in assets – but it has its draws. This fund is actually a "twin" of the Guinness Atkinson Alternative Energy Fund (GAAEX), which launched in 2006, and is run by GAAEX's three managers: Will Riley, Jonathan Waghorn and Edward Guinness.
Moreover, Morningstar has seen fit to give Sustainable Energy II ETF a Bronze analyst rating.
"SmartETFs Sustainable Energy II ETF's management team is just average, but a solid investment process still helps this strategy retain its Morningstar Medalist Rating of Bronze," Morningstar says. "The most significant contributor to the rating is its parent firm's excellent long-term risk-adjusted performance, as shown by the firm's average 10-year Morningstar Rating of 4.5 stars."
Alerian MLP ETF
- Assets under management: $6.8 billion
- Dividend yield: 7.8%
- Expenses: 0.85%
Income-minded investors might prefer our next pick to many of the other still-generous dividend ETFs on this list.
The Alerian MLP ETF (AMLP, $40.81) is interested in a special subsector of energy: master limited partnerships (MLPs). Now, master limited partnerships themselves are merely a business structure – one that pairs the benefits of publicly traded equity with some special tax perks.
From contributor Aaron Levitt:
"MLPs, which first began to form in the 1980s, are a type of 'pass-through entity.' That's because their income isn't taxed at the corporate level, and is instead 'passed through' directly to owners and investors via dividend-esque 'distributions.' This system typically results in much-higher-than-average yields, often in the 7%-9% range."
However, as it pertains to the sector, most energy MLPs tend to relate to infrastructure: pipelines, terminals, storage and other facilities that make up the energy supply chain. AMLP's holdings, for instance, include the likes of:
- Energy Transfer LP (ET), with 120,000 miles of nationwide energy infrastructure
- Plains All American Pipeline LP (PAA), which is responsible for transportation, terminalling, storage and gathering assets in key crude oil and natural gas liquid (NGL)-producing basins and transportation corridors in the United States and Canada
- Magellan Midstream Partners LP (MMP), which transports, stores and distributes petroleum products
These types of companies typically feature much higher yields than exploration-and-production, refinery and distribution companies – evident in AMLP's juicy 7%-plus yield.
One benefit of holding MLPs through the AMLP energy ETF is that you can avoid the K-1 tax form that's typically required when unitholders receive MLPs' pass-through income (referred to as distributions). AMLP processes the K-1 forms and instead distributes a basic 1099 to shareholders instead. But do consider consulting your tax advisor when deciding how to invest in MLPs.
United States 12 Month Oil Fund LP
- Assets under management: $77.2 million
- Dividend yield: 0.0%
- Expenses: 0.85%
Most of the best energy ETFs only allow you to gain exposure to changes in energy prices via energy stocks. But a few funds allow you to invest in another way: energy futures.
The largest such fund is the United States Oil Fund LP (USO), which tracks the price of West Texas Intermediate (WTI, aka U.S. crude oil), but numerous weaknesses were exposed when oil prices went negative during the COVID crash of 2020, forcing the ETF to change its investment structure multiple times. It previously only invested in "front-month" futures, forcing it to constantly sell contracts about to expire and replace them with futures expiring in the next month – which resulted in disastrous results during 2020's oil plunge. Subsequent changes allowed it a little more flexibility to invest in longer-dated contracts.
We prefer a related way to track oil: USO's little brother, the United States 12 Month Oil Fund LP (USL, $39.64). USL, like USO, invests in futures, but it does so with not only front-month contracts, but also contracts for the following 11 months – so basically, across 12 months of futures instead of just a couple. This strategy historically has produced much more similar gains for USL to actual spot oil prices than USO.
Just know USL's weaknesses. While it's a more direct play on oil prices, it still won't perfectly track WTI, and you won't receive dividend income like you will with so many of the other energy ETFs on this list.
(Note: If you want to play natural gas in a similar manner, USCF also offers the United States 12 Month Natural Gas LP (UNL), at a 0.90% expense ratio.)
Kyle Woodley is the Editor-in-Chief of Young and The Invested, a site dedicated to improving the personal finances and financial literacy of parents and children. He also writes the weekly The Weekend Tea newsletter, which covers both news and analysis about spending, saving, investing, the economy and more.
Kyle was previously the Senior Investing Editor for Kiplinger.com, and the Managing Editor for InvestorPlace.com before that. His work has appeared in several outlets, including Yahoo! Finance, MSN Money, Barchart, The Globe & Mail and the Nasdaq. He also has appeared as a guest on Fox Business Network and Money Radio, among other shows and podcasts, and he has been quoted in several outlets, including MarketWatch, Vice and Univision. He is a proud graduate of The Ohio State University, where he earned a BA in journalism.
You can check out his thoughts on the markets (and more) at @KyleWoodley.
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