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The Energy Market's Most Important ETFs

Anes Alic

An ETF explosion has taken over the financial market as exchange-traded funds enjoy the lion’s share of investment dollars globally--even as investors continue flocking to passive funds and shunning actively managed mutual funds.

The sheer growth numbers have industry punters licking their chops. 

From just a handful of offerings a couple of decades ago, we're now bombarded with a cornucopia of everything ETF: 136 providers in the United States now offer 2,062 ETFs to investors backed by an impressive $4 trillion in assets under management (AUM). 

According to the latest update by independent ETF research firm ETFGI, assets invested in the global ETFs and ETPs (exchange-traded products) space clocked in at $5.78 trillion by the end of September 2019, reflecting new inflows of $350.25 billion over the preceding 12-month period.

The ETF industry is now $2.5 trillion bigger than the mutual fund industry.

Yet, as Deborah Fuhr, founder of ETFGI, has told CNBC’s ETF Edge, these are simply the early innings, with the burgeoning industry set to scale to even higher heights thanks to the SEC recently creating a more level playing field after watering down its arduous exemptive relief rule.

Unfortunately, the same cannot be said about energy ETFs.

Source: ETFGI

Investing in Mainstream Energy ETFs

With the energy sector going through another of those notorious bust cycles, exchange-traded funds in the space have, predictably, been getting the cold shoulder from the investing universe with the majority of the 82 energy ETFs listed on ETFdb already in the red in the year-to-date.

With thematic products such as inverse, bear, and clean energy ETFs outperforming their more mainstream brethren, it’s tempting to put all your eggs in the niche basket. However, niche ETFs have their limitations, including lower assets under management (AUM), low liquidity, high volatility and higher trading expenses. 

Related: 5 Niche Energy ETFs You’ve (Probably) Never Heard Of

For instance, one of the better performing energy ETFs over the past 12 months, GASX, boasts a return of 110.7% vs. -8.3% by XLE, the industry’s most popular benchmark. However, GASX has just $23.4M assets under management to its name and an expense ratio of 1.09% compared to $9.87B AUM and an expense ratio of just 0.13% by XLE. Further, niche ETFs are, by definition, non-diversified while bigger funds tend to be heavily diversified, thus providing a measure of downside protection.

As one American politician once admonished to never let a good crisis go to waste, some beaten-down ETFs might be screaming bargains that offer nice entry points--especially when energy prices stage a comeback. 

Here are five of the energy market’s most important ETFs to consider for your portfolio.

#1 Energy Select Sector SPDR ETF (XLE)

      AUM: $9.87B

      Expense Ratio: 0.13%

     12-Month Returns: -8.27%

With nearly $10 billion in AUM, Energy Select Sector SPDR ETF (NYSEARCA:XLE) is the largest dedicated energy fund. It’s also the most liquid, with a trailing three-month volume average of nearly 14 million trades per day. At an expense ratio of just 0.13%, it’s also one of the cheapest in the space.

XLE tracks the price and yield performance of companies in the Energy Select Sector Index. The index offers investors broad exposure to companies in the oil, gas and energy equipment industries. One shortcoming though is that the ETF has less than 30 stocks in its portfolio, with ExxonMobil (NYSE:XOM) and Chevron Corp.(NYSE:CVX) over-represented--the two hog 21.69% and 19.74% weighting, respectively. 

As of this writing, XLE is trading at $55.41 a share while the shares are down 7.8% in the year-to-date.

#2 Vanguard Energy ETF (VDE)

      AUM: $2.92B

      Expense Ratio: 0.10%

     12-Month Returns: -11.42%

Vanguard funds are popular for undercutting the competition on costs; the Vanguard Energy ETF (NYSEARCA:VDE) has remained true to this ethos by offering the lowest pricing in the sector. With more than 70 stocks--albeit with less AUM-- VDE is a little bit better diversified than XLE, though XOM and CVX still play outsized roles with weightings of 21.68% and 17.38%, respectively.

VDE tracks the performance of the MSCI US Investable Market Index (IMI)/Energy 25/50, an index consisting of stocks of large- and mid-cap US energy companies. VDE shares currently trade at $74.45 with YTD return of -8.64%.

#3 SPDR S&P Oil & Gas Exploration & Production ETF(XOP)

      AUM: $2.31B

      Expense Ratio: 0.35%

     12-Month Returns: -33.22%

If you are not content settling for a vanilla fund that targets obvious energy candidates such as XOM and CVX, this SPDR offers a good way to dip your toes into something different. SPDR S&P Oil & Gas Exploration & Production ETF (NYSEARCA:XOP) focuses on about 60 energy exploration and production companies. The fund is pretty well diversified: WPX Energy (NYSE:WPX), the top holding in the fund, has a weighting ?3% of the entire portfolio.

Related: Traders Increase Short Interest In Big Oil Stocks

That said, diversification is not always what it’s cracked up to be: XOP is highly exposed to smaller energy companies, which can lead to high volatility and poor returns when the energy markets sputter.

#4 VanEck Vectors Oil Services ETF(OIH)

      AUM: $591.9M

      Expense Ratio: 0.35%

     12-Month Returns: -33.25%

VanEck Vectors Oil Services ETF (NYSEARCA:OIH) is an energy fund that provides a different take on the oil patch by focusing on service stocks such as Halliburton Co. (NYSE:HAL) and Schlumberger (NYSE:SLB) instead of integrated energy companies. 

The OIH portfolio consists of nearly 70 oil services company stocks. The ETF also enjoys strong liquidity with trailing three-month volume average of 9,983,104 trades per day.

#5 iShares MSCI Global Energy Producers ETF(FILL)

      AUM: $44.4M

      Expense Ratio: 0.39%

     12-Month Returns: -6.36%

The energy universe extends far beyond the borders of the United States. 

The iShares MSCI Global Energy Producers ETF (FILL) attempts to reflect this reality by investing in leading international E&P players such as BP Plc. (NYSE:BP),Total (NYSE:TOT), Royal Dutch Shell (NYSE:RDS.A) and Lukoil (MCX:LKOH). Still, US energy giants are well represented with XOM and CVX boasting a combined weighting of nearly 24%.

A major drawback: FILL is a thinly traded ETF with a three-month daily average trading volume of just 23,857.

By Anes Alic for Oilprice.com

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