Looking to profit from soaring energy prices? Consider these 5 ETFs.
The war in Ukraine has driven up energy prices, and there are a plethora of energy-focused exchange-traded funds that allow you to ride the wave.
They range from an ETF like State Street Global Advisors’ Energy Select Sector SPDR ETF (ticker: XLE), which is heavily concentrated in a few large companies, to one like the
Invesco S&P 500 Equal Weight Energy ETF
(RYE), which has greater exposure to energy small and mid caps.
Oil prices soared this week to their highest levels since 2008. On Tuesday, the United States announced it would ban imports of Russian oil after the country invaded Ukraine. Such a move will further limit global supply as U.S. consumers face the highest prices ever at the gas pump.
While investors may believe they have broad exposure to the energy sector within their broader portfolio, that’s not the case, says Todd Rosenbluth, head of ETF and mutual fund research. placement at the CFRA. The energy sector represents only 4% of the
S&P 500 Index, far behind the 27% of the technology sector. “With targeted energy stock ETFs, an investor can overweight exposure if they are confident that the price of oil is going to stay high,” he says.
The key is confidence in the price direction. For investors considering getting into energy ETFs, there is clear momentum behind the sector. But it remains to be seen how much longer the upward trajectory will continue. It could run out of steam in the coming months or even tomorrow – no one can know for sure where the price of a commodity is heading.
Rosenbluth warns that investors should focus on equity ETFs that invest in energy companies, rather than commodity ETFs which are a portfolio of futures, futures and swap contracts on the underlying commodities . Indeed, the price of crude oil and raw materials will remain volatile as they are linked to geopolitical events. Energy companies are also affected by geopolitical events, of course, but there is not the same degree of volatility.
Energy prices were already on an upward trend before war broke out as production failed to keep pace with growing global demand in the wake of the Covid-19 pandemic. The war in Ukraine has pushed prices up even further.
“There will likely be continued volatility, which will make it harder to get a good idea of what’s next for the price of oil, while earnings are a bit more stable,” he says. “Energy ETFs that invest in energy companies themselves have more stability.”
For investors considering getting into energy ETFs, here are five funds to consider.
State Street Global Advisors’ Energy Select Sector SPDR ETF takes a broad look at energy and consists largely of oil and gas companies. Its two main holdings are Exxon Mobil (XOM) and Chevron (CVX). These two holdings represent more than 40% of the portfolio. The fund is up 38% since the start of the year.
This can be a stunning return, but it’s important to consider how concentrated the fund is with its two largest holdings.
For more balance, Rosenbluth recommends the Invesco S&P 500 Equal Weight Energy ETF. Even though it invests in the same S&P 500 companies found in other ETFs, by being equally weighted it has more exposure to more mid- and large-cap companies” so it’s more dispersed instead to be dominated by Exxon and
who are the heavyweights in the energy sector,” says Rosenbluth.
With this ETF, investors gain greater exposure to companies such as
(PSX), he adds. “So you get more diversification into the energy sector and at different stages of development, from drilling and services to oil and gas transportation to integrated companies as well.”
The top three holdings, all greater than 5% of the portfolio, are
(MOR). So far this year, the fund has returned 36%.
Another fund to consider is the SPDR S&P Oil & Gas Exploration & Production (XOP), which tracks producers, not refiners or other segments of the energy industry. Rosenbluth says there are a few reasons that make this ETF appealing.
The first is that with energy prices at historic highs and strong demand but limited supply, energy companies are likely to spend more to explore and find new sources of oil. This has a double benefit for investors, he says, as they can take advantage of high oil prices even as companies spend heavily to increase their future energy reserves.
Another reason is that the ETF is weighted equally between large, medium and small companies. “These smaller companies are less likely to be so close to Russia,” Rosenbluth says. “Smaller US-based exploration and production companies tend to derive more revenue from the United States and are therefore less sensitive to geopolitical events and what is happening. [in Russia and Ukraine].”
XOP’s three main holdings are Occidental,
, at only 3.4%, 2.9% and 2.7%, respectively. The fund is up 31% since the start of the year.
The other two energy funds that have seen strong asset inflows this year are the
Vanguard Energy Index Fund ETF (VDE) and
iShares US Oil & Gas Exploration & Production ETF
(IEO). VDE offers investors broad exposure to US energy stocks. Its three main holdings are
(XOM), Herringbone (CVS) and
), at 21.3%, 16.9% and 7.9%, respectively. Since the start of the year, it has returned 35%. IEO’s three main holdings are
Pioneer of natural resources
(PXD) at 18.7%, 9.8% and 7.7%, respectively. So far this year, it has returned 32%.
|Funds||Teleprinter||ETF flows 1 year ($M)||Cumulative flows since the beginning of the year (M$)|
|Energy Select Sector SPDR ETF||XLE||4,997||2,343|
|SPDR S&P Oil & Gas Exploration & Production ETF||XOP||-249||547|
|Vanguard Energy ETF||VDE||905||320|
|iShares US Oil & Gas Exploration & Production ETF||IEO||262||243|
|Invesco S&P 500 Equal Weight Energy ETF||RYE||249||130|
Notes: As of March 4, 2022
Write to Lauren Foster at [email protected]