7 Energy ETFs for High Oil & Gas Prices
Energy has outperformed in 2022, and the upside could continue amid geopolitical tensions and rising demand. Here are seven energy funds to leverage those gains.
Energy stocks and exchange-traded funds (ETFs) were a popular bet heading into 2022. So far, so good – the sector has been by far and away the best performer as the year nears the midway point. And thanks to several expected tailwinds, as well as more recent and unexpected drivers, the good times could continue in energy ETFs and individual shares alike.
Strategists were widely bullish on energy prices, and especially crude oil, as already-tight supplies were expected to butt heads with rising demand. In January, Schlumberger CEO Olivier Le Peuch said that barring any other COVID-related disruption, "Oil demand is expected to exceed pre-pandemic levels before the end of the year and to further strengthen in 2023."
However, energy prices have received an additional boost from overseas, where Russia executed an invasion of neighboring Ukraine. U.S. crude oil prices have shot up 26% this year as a result, to around $114 per barrel currently, sending gasoline prices through the roof.
"It looks like the only thing that will send oil back to the pre-COVID levels is demand destruction across the world’s largest economies, and that probably won’t happen," says Edward Moya, senior market strategist at currency data provider OANDA. "Oil prices will likely remain supported above the $100 level for the rest of the year."
Although investors could consider playing continued high oil prices via individual energy stocks, energy ETFs provide diversified exposure to the sector. They spread out an investor's bets across multiple stocks, and, in many cases, across multiple industries within the energy complex.
Here, we explore seven energy ETFs sporting a variety of strategies. Most of these funds are extremely sensitive to energy-price movements – but that relationship cuts both ways. If you believe there's additional upside to be had in oil and natural gas, these funds should help you leverage those gains. On the other hand, if crude and nat-gas prices head lower, these ETFs likely will struggle.
Data is as of May 26. Yields represent the trailing 12-month yield, which is a standard measure for equity funds.
Vanguard Energy ETF
- Market value: $8.7 billion
- Dividend yield: 3.2%
- Expenses: 0.10%, or $10 annually on a $10,000 investment
The Energy Select Sector SPDR Fund (XLE) is usually first and foremost in any list of the market's premier energy ETFs, given that it's the oldest, largest and most heavily traded fund in the space – not to mention, at 10 basis points, it's dirt-cheap.
However, investors might instead look at the equally inexpensive Vanguard Energy ETF (VDE, $120.84) – the No. 2 energy ETF by assets and one of Kiplinger's 22 best ETFs for 2022.
The case for Vanguard's fund largely hinges on diversification. The XLE invests in any and all of the S&P 500's energy stocks, which at the moment stands at a thin 21. However, VDE tracks the energy components of a much wider index, resulting in a fatter collection of more than 100 sector components.
These holdings provide exposure to the various ways to make a buck off energy. Integrated energy firms make up more than 40% of assets, followed by exploration and production companies (30%), and storage and transportation (10%). Equipment and services providers, as well as refiners and marketers, each earn high-single-digit weights, too.
VDE and XLE share one other noteworthy characteristic: Extremely heavy weights in the sector's two largest components, Chevron (CVX) and Exxon Mobil (XOM). They combine to account for 38% of VDE's assets, which is smaller than XLE's 44% but still enough to define the ETF's performance.
Investors looking for a more balanced holdings set might instead consider the Invesco S&P 500 Equal Weight Energy ETF (RYE), which holds the S&P 500's components in equal amounts at each rebalancing.
Invesco Dynamic Energy Exploration & Production ETF
- Market value: $307.8 million
- Dividend yield: 1.6%
- Expenses: 0.63%*
If you're looking for a somewhat more concentrated way of investing in energy equities, you might consider exploration and production (E&P) companies. These firms seek out sources of oil and natural gas, then physically extract the hydrocarbons. They typically make their money by selling oil and gas to refiners, who turn them into products such as gasoline, diesel fuel and kerosene.
While costs to extract those hydrocarbons vary from company to company, in general, the more they can sell those hydrocarbons for, the fatter their profits. And thus their stocks tend to be the most heavily dependent on commodity prices.
The Invesco Dynamic Energy Exploration & Production ETF (PXE, $32.42) homes in on this industry, investing in a portfolio of roughly 30 stocks that are primarily engaged in E&P. These companies include the likes of Occidental Petroleum (OXY), Valero Energy (VLO) and Comstock Resources (CRK).
While many energy ETFs will simply assign weights to each stock based on their relative size (e.g., the largest stocks account for the largest percentages of the fund's assets), PXE does things a little differently. For one, its underlying index evaluates companies based on various criteria, including value, quality, earnings momentum and price momentum. It also "tiers" market capitalization groups, ultimately giving mid- and small-sized companies a chance to shine. Roughly 31% of PXE's assets are allocated to small-cap stocks, and another 28% are in midsize firms, leaving about 40% to larger corporations.
These smaller companies sometimes react more aggressively to oil- and gas-price changes than their larger brethren – good news for PXE when commodity prices spike, but more painful when they slump.
* Includes a 32-basis-point fee waiver good through at least Aug. 31, 2023.
First Trust Natural Gas ETF
- Market value: $891.5 million
- Dividend yield: 1.6%
- Expenses: 0.60%*
Many energy ETFs have a decided tilt toward oil stocks, but those interested specifically in natural gas can tap the First Trust Natural Gas ETF (FCG, $28.00).
FCG tracks an index of companies that derive "a substantial portion" of revenues from natural gas E&P. Companies must meet various requirements, including a minimum level of nat-gas proved reserves, market capitalization and liquidity. The fund is then weighted using a liquidity-adjusted market capitalization methodology.
The result is that holdings such as $11 billion Western Midstream Partners LP (WES, 3.7% weight) can have every bit as much impact (if not more) on performance as companies such as mega-cap ConocoPhillips (COP, 3.9% weight) and its $146 billion market value.
* Includes a 5-basis-point fee waiver good through at least April 30, 2023.
JPMorgan Alerian MLP Index ETN
- Market value: $2.6 billion
- Dividend yield: 6.3%
- Expenses: 0.85%
Energy master limited partnerships (MLPs) are a popular energy investment among the income-focused. That's because these companies, in exchange for being able to avoid paying corporate taxes, must distribute most of their cash flows back to investors – via cash "distributions," which are similar to dividends but treated differently come tax time.
One downside to investing in individual MLPs, however, is that you also have to deal with a complicated K-1 tax form each year. You can get around this via a few MLP ETFs, but you still have to deal with the potentially high income-tax expenses that come from receiving the distributions.
The JPMorgan Alerian MLP Index ETN (AMJ, $21.68) is a popular end-around to this problem.
Let's start with the simple stuff: The AMJ tracks the performance of a fairly concentrated group of MLPs. Magellan Midstream Partners LP (MMP), Enterprise Products Partners LP (EPD) and Energy Transfer Partners LP (ET) alone account for nearly a third of the fund's assets. But given high distributions practically across the board, AMJ offers up a yield of well more than 6% at current prices.
After that, things get a little complicated.
AMJ isn't an exchange-traded fund – it's an exchange-traded note, or ETN. Without getting too into the weeds, it's effectively debt in an ETF wrapper, which has some advantages and disadvantages.
You buy and sell an ETN exactly like you would an ETF. ETNs act just the same, too, providing returns based on the performance of an underlying index. (And in fact, because of how they're structured, ETNs can more faithfully track their underlying index than comparable ETFs.)
AMJ's distributions, meanwhile, are quarterly coupon payments that are simply taxed like ordinary income. And this has typically been its appeal to investors looking for an alternative to traditional MLP ETFs.
However, some (typically extreme-case) scenarios, JPMorgan's creditworthiness could actually have an impact on the fund's performance. And that's a risk investors should at least be aware of.
iShares North American Natural Resources ETF
- Market value: $1.1 billion
- Dividend yield: 2.3%
- Expenses: 0.43%
The iShares North American Natural Resources ETF (IGE, $42.87) provides broad-based energy-sector exposure similar to the XLE or VDE, but with a number of twists.
The first has to do with the name. This isn't a collection of merely U.S. stocks, but holdings from across North America. U.S. companies still dominate the fund, at 78%, but the remaining assets are spread across numerous Canadian companies, including multinational Enbridge (ENB) and Canadian Natural Resources (CNQ).
IGE is another broad portfolio at more than 110 holdings. Because the fund is cap-weighted, Chevron and Exxon are still tops, but they make up far smaller percentages of IGE's assets – roughly 10% each.
Another difference is found in the name: "natural resources." In addition to heavy investment in energy industries such as integrated oil and gas companies (26%), E&P (26%) and storage and transportation (14%), IGE also owns gold mining (8%) and even construction materials (2%) companies, among other non-energy firms.
Thus, while IGE will move on changes in oil and gas prices, its movement can be affected by other commodities, too.
iShares Global Energy ETF
- Market value: $2.4 billion
- Dividend yield: 3.1%
- Expenses: 0.43%
The iShares Global Energy ETF (IXC, $40.49) takes geographical diversification another step farther, and unlike IGE, it focuses completely on energy.
Investing terminology is often deliberate. For instance, "global" and "international" might sound the same, but they mean two very different things. An "international" fund typically won't hold U.S. stocks, while a "global" fund will – and in the case of many global funds, American companies are the largest slice of the pie.
This energy ETF is no exception, holding a 60% slug of American companies. It also has another 13% of its assets invested in Canadian firms. But it also invests in decent chunks away from the continent; the U.K. (12%) and France (5%) are significant weights in the fund, as well. Investors also can enjoy access to energy firms in Brazil, Australia and Italy, among a few other countries. International top holdings include British-domiciled Shell (SHEL) and BP (BP).
Like other energy ETFs, IXC's holdings are primarily driven by oil and gas prices. But other factors are at play, such as the fact that some of these companies have distribution businesses that are reliant on strong gasoline demand, which can be affected by a country's economic strength. Investing across several countries can help reduce such risks.
United States 12 Month Oil Fund LP
- Market value: $144.0 million
- Dividend yield: N/A
- Expenses: 0.9%
But what if you want to invest closer to the source? That is, what if rather than buying oil companies, you wanted to invest in crude oil itself?
The United States 12 Month Oil Fund LP (USL, $41.69) is one of a few energy ETFs that let you do that … but be warned that it's not as straightforward as it seems.
The USO is an "exchange-traded security designed to track the daily price movements of West Texas Intermediate ('WTI') light, sweet crude oil" – what most refer to as "U.S. crude." However, unlike some commodity funds, such as the SPDR Gold Funds (GLD), that actually hold the physical commodity, USL invests in crude oil futures, as well as other financial instruments to generate its returns.
Specifically, USL invests in "near-month" futures, as well as futures for the next 11 months (so, 12 months in total). It's not a perfect system – USL's chart will never look like a carbon copy of WTI spot prices – but it's more accurate than several alternatives, including its much more popular sister fund, the $2.8 billion United States Oil Fund LP (USO).
For most of its existence, USO held only "front-month" futures, so every month it had to sell any contracts that were about to expire and replace them with futures expiring in the next month. That sometimes resulted in cases where USO was selling contracts for less than what it was buying up new ones for – or sometimes the opposite, buying for less than what it was selling for. However, energy-price chaos in spring 2020 upended USO to the point where it changed its methodology to allow it to hold various months' contracts.
So, USL might be far from perfect, but it's one of the best in its class of energy ETFs should you want more "direct" exposure than equity-focused funds.
