The Best Energy ETFs To Buy In 2022
Since energy companies tend to withstand inflation easier than most companies, investors often turn to energy ETFs when inflation rises.
Economies run on energy. And people are generally forced to buy energy at whatever price, as it’s difficult to cut back on energy usage.
What is an Energy ETF?
Energy ETFs invest in companies that conduct business primarily in the energy sector. This includes oil stocks, oil refining stocks, solar stocks, and even renewable energy stocks. There are various types of companies within this sector, making it a challenging industry to select individual companies for investment.
Energy ETFs give you exposure to a diversified group of equities. However, these funds come in various types, so you should understand the following types of energy ETFs before you invest to make a better investment decision.
Types of Energy Companies:
Exploration and production (E&P)
The exploration and production area of the energy sector is primarily involved in finding, developing, and producing crude oil. These companies focus on the early stage of energy production by finding and extracting the raw materials necessary for the energy business.
Stock examples: Occidental Petroleum, Devon Energy, & ExxonMobil.
Refining
A refining company takes crude oil and converts it into usable products such as gas, kerosene, and jet fuel. Refining breaks crude oil into various components used to configure new products.
Stock examples: Valero Energy, PBF Energy, & Delek US.
Master Limited Partnerships (MLP)
An MLP is a master limited partnership that combines a private partnership’s tax advantages with the liquidity of a stock. The MLP business structure is typically used with pipeline companies and pays considerable dividends.
Stock examples: CVR Partners, CrossAmerica Partners, & Black Stone Minerals.
Oil equipment and services (E&S)
Oil equipment and services (E&S) companies provide the equipment and services necessary to evaluate, build and maintain gas and oil wells. In addition, these companies may rent out equipment such as drilling rigs.
Stock examples: Recon Technology, Mammoth Energy, & Helix Energy.
Crude oil
Crude oil ETFs seek to track the spot price of oil by using future contracts. However, futures ETFs may suffer from negative roll yields and are unsuitable for long-term investments. Investing in crude oil ETFs is generally used as a short-term trading strategy.
Clean energy
Clean energy ETFs invest in companies in the alternative energy sector, such as wind, solar, hydroelectric, and geothermal stocks. These are great funds to invest in if you want exposure to clean energy growth.
The Best Energy ETFs
Energy Select Sector SPDR Fund ($XLE)
This index is composed of S&P 500 companies within the energy sector.
The two top holdings of this ETF are Exxon Mobil and Chevron, which makes up nearly half of the fund.
Therefore, performing due diligence on these specific companies is a good idea before investing in this ETF.
The expense ratio of the fund is also comparable at just 0.10%.
10 year average return: 4.89%
Expense ratio: 0.10%
Dividend yield: 3.48%
Number of stocks held: 21
Top 10 Stocks Held In $XLE:
Image source: ETF.com
SPDR S&P Oil & Gas Exploration & Production ETF ($XOP)
The SPDR S&P Oil & Gas Exploration & Production ETF seeks to track the performance of the S&P Oil & Gas Exploration & Production Select Industry Index.
This ETF is much more diversified than $XLE, which is great for investors who want broader exposure to the energy market.
However, this ETF has a higher expense ratio and a lower dividend yield than $XLE.
Depending on your investment goals, $XOP may be a good choice for a more diversified approach to the energy sector.
10 year average return: -2.32%
Expense ratio: 0.35%
Dividend yield: 1.44%
Number of stocks held: 61
Top 10 Stocks Held In $XOP:
Image source: ETF.com
Vanguard Energy Index Fund ($VDE)
A list of ETFs is hardly complete without a Vanguard fund, and the Vanguard Energy Index Fund is an excellent choice to gain exposure to the energy sector.
This ETF seeks to track the performance of the MSCI US Investable Market Index (IMI)/Energy 25/50.
The holdings are similar to $XLE, as Chevron and Exxon Mobil make up a large portion of the fund.
Additionally, the expense ratio and 10 year performance are nearly identical to XLE.
The only significant difference is that $XLE may have more liquid options than the Vanguard fund, as it’s a larger fund.
10 year average return: 2.77%
Expense ratio: 0.10%
Dividend yield: 3.25%
Number of stocks held: 109
Top 10 Stocks Held In $VDE:
Image source: ETF.com
VanEck Oil Services ETF ($OIH)
The VanEck Oil Services ETF seeks to track the performance of the MVIS US Listed Oil Services 25 Index.
The companies within the index have various market valuations and may even include foreign companies.
This ETF includes 25 companies, making it less diversified than many other energy funds.
However, a solid portion of the ETF is allocated to the companies Schlumberger and Halliburton.
Therefore, you should look into these companies before investing in this fund.
10 year average return: -9.89%
Expense ratio: 0.35%
Dividend yield: 0.75%
Number of stocks held: 25
Top 10 Stocks Held In $OIH:
Image source: ETF.com
iShares Global Clean Energy ETF ($ICLN)
The iShares Global Clean Energy ETF seeks to track an index composed of companies within the renewable energy sector.
As the climate becomes more important to the general public, the clean energy sector should continue gaining investor confidence and investment.
These companies will give traditional energy companies solid competition as clean energy technology advances.
Instead of speculating on the best clean energy stocks, the $ICLN ETF will give you exposure to a broad basket of sustainable energy companies in the sector.
10 year average return: 12.59%
Expense ratio: 0.40%
Dividend yield: 1.20%
Number of stocks held: 99
Top 10 Stocks Held In $ICLN:
Final Thoughts: Best Energy ETFs
Energy ETFs can be a great way to hedge your portfolio in times of high inflation. That is because energy companies have more flexibility to increase their prices without decreasing demand whenever they need to. The world runs on energy. And companies will always be around to fulfill that demand.
Also, sign up for my email list to be the first to know when I publish a new blog post!
Want to keep learning? Check out some of my other blog posts:
As Always: Buy things that pay you to own them.
-Josh
Blog Post: #060
