by Aaron Levitt | March 22, 2013 9:29 am
Since their introduction in the early 1990s, the simple experiment of an “index fund that behaves like a stock” has completely revolutionized investing for both institutional and retail portfolios. Because, as InvestorPlace Editorial Assistant Alyssa Oursler pointed out recently, exchange traded funds are a great way to get a lot of stock or bond diversification for not a lot of dough.
More and more money managers and individual investors have thus been making the switch from mutual fund holdings to ETFs. In fact, in the U.S. alone, over $2 trillion of assets sit in ETFs and their exchange traded note (ETN) cousins. And if you add up all the funds across the U.S., Canada, Europe and Asia, there are more than 4,700 different ETFs available to choose from.
Of course, such a staggering number does make it difficult to pick just the right ETF — especially in certain sectors of the market. For example, my personal portfolio stomping ground — the energy sector — has nearly 27 different funds to choose from.
Heck, that number jumps to almost 80 if you include those tracking energy commodities, master limited partnerships and those companies involved in renewable energy.
Luckily, I’ve already sorted through the stack for you to find the very best options. Here are the top five energy ETFs to consider for your portfolio.
Asset manager Vanguard is the company that invented the index fund. Its focus is on passing savings down to regular retail investors, so its no wonder Vanguard’s ETF line-up features some of the lowest expense ratios on the planet. The Vanguard Energy ETF (NYSE:VDE), for one, clocks in at a rock-bottom 0.14%.
For that little bit in costs, investors actually get quite a lot.
The fund tracks the performance of the MSCI U.S. Investable Market Energy 25/50 Index — an index of large, medium, and small U.S. companies in the energy sector. On the whole, VDE provides exposure to 169 different energy firms, from integrated giants and independent exploration firms to midstream providers and even coal miners. (Of course, coal producers make up only 1.1% of the fund’s assets.)
Top holdings include integrated energy superpower Exxon Mobil (NYSE:XOM) at around 21% of assets, while Chevron (NYSE:CVX) and oil service giant Schlumberger (NYSE:SLB) round out the top three. More importantly, the fund’s broad exposure and low expense ratio has helped it return an annual 11% since its inception in 2004.
Overall, VDE could be the best “buy & hold” choice for those investors wanting to play rising global energy demand.
Crude oil and natural gas are global commodities, consumed and traded all over the world. As such, some of the sectors best opportunities lie within firms domiciled outside of the U.S. That’s where the iShares S&P Global Energy ETF (NYSE:IXC) comes in.
Aside from providing a 51% weighting of energy firms in the states, the fund also tracks a virtual who’s-who of the largest international energy concerns across its 90 holdings. This includes companies like France’s Total (NYSE:TOT) and BP (NYSE:BP). That international focus also includes a nearly 10% weighting towards Canada — a nation most investors a woefully under exposed to.
Of course, expenses for IXC aren’t as cheap as Vanguard’s star energy fund, coming in at 0.48%. However, the fact that IXC basically follows a 50/50 breakdown of U.S. and international companies means that price is pretty reasonable.
Plus, over the last decade, IXC has managed to produce just under a 12% annual return.
Sometimes, you just want to focus on the biggest of the big … and no ETF does that better than the Energy SPDR (NYSE:XLE).
With nearly $7.7 billion in assets, the XLE tracks the energy sector representatives of the S&P 500. As expected, that mandate results in a concentrated portfolio of just 43 different energy names with an average holding around $127 billion. And these aren’t junior explorers or wildcatters. No, we are talking about Exxon, Chevron and Occidental Petroleum (NYSE:OXY) — the big dogs of the U.S. energy sector.
While the XLE’s holdings are contained in many energy ETFs, the fund provides a unique way to capitalize on the growth in energy demand and production globally. Many of its constituents have their hands in production activities and reserves located all over the world, as well as refining and export interests.
The fund’s concentrated nature provides plenty of E&P muscle, all for only 0.18% in expenses.
Higher energy prices and rising demand are quickly becoming a win-win for energy services stocks. Providing the equipment and technological know-how needed to extract oil and gas from harsh environments such as the vast oil sands in Alberta or in the ultra-deep water fields off the coast of Africa, the oil services companies are poised to benefit on a variety of fronts.
And since the Market Vectors Oil Services ETF (NYSE:OIH) went through its “rebirth” from the defunct HOLDRs to a Van Eck fund back in December of 2011, investors can play that opportunity quite nicely.
The ETF tracks 26 of the largest U.S.-listed oil services companies including Halliburton (NYSE:HAL) and Schlumberger … all for around 0.35% in annual expenses. While it is a focused mix of firms, it does provide enough “oomph” across the entire realm of oil services from the drill-bit to your gas tank.
Finally, investing in the producers of a certain commodity is completely different from investing in the underlining commodity itself. The energy sector is no different.
The PowerShares DB Energy Fund (NYSE:DBE) allows investors to profit from a wide swath of energy-related commodities and their prices. The ETF tracks the DBIQ Optimum Yield Energy Index Excess Return — a benchmark consisting of natural gas, WTI & Brent crude, RBOB Gasoline and heating oil futures contracts.
DBE charges 0.78% in expenses and is structured as a limited partnership for tax purposes.
Than means it could produce some headaches come tax time — you’ll get a K-1 statement — but it’s still a good choice for the risk-tolerant investor looking to cash in on the rising energy prices.
As of this writing, Aaron Levitt did not own a position in any of the aforementioned securities.
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