It’s a good practice to sift through your portfolio once or twice a year to do some rebalancing. Look around at how various sectors are represented in your portfolio — it’s likely that some could stand to lose some weight, while others could use some padding.
Many investors today will find themselves underweight on energy stocks, if only because the sudden slump in crude oil prices over the past year had many selling out of the sector.
Just 11 months ago, crude oil was trading for $97.08 per barrel. Today — even after nearly a 20% rebound off the bottom — prices remain below the $60 level.
However, I’m the type of guy who believes in reversion to the mean, and I think energy stocks represent a unique opportunity for individual investors at today’s fire-sale prices for when oil prices claw back even more of that lost ground.
There are a few ways you could go about increasing your exposure to energy stocks. Here are three of the simplest, most effective ways:
Energy Stocks to Buy: Energy Select Sector SPDR (ETF) (XLE)
Sector-specific ETFs offer investors a great way to gain broad exposure to areas of the market they want to invest in, whether they think stocks there are overvalued, primed for growth or offer safety.
And there is perhaps no better way to track the U.S. energy sector than the sector-specific energy ETF from State Street Global Advisors, the Energy Select Sector SPDR (ETF) (NYSEARCA:XLE).
The XLE currently boasts a portfolio of 41 of the top domestic oil and gas companies around. This includes integrated giants like Exxon Mobil Corporation (NYSE:XOM) and Chevron Corporation (NYSE:CVX), as well as energy services companies like Schlumberger Limited (NYSE:SLB).
The price for this broad exposure? Just 0.15%, or $15 for every $10,000 invested. That’s more than made up by the fund’s dividend yield, which sits at 2.5% for the trailing year’s worth of payouts.
As you might imagine, XLE’s performance has been rocky amid the slump in energy prices, with units of this ETF falling roughly 20% since peaking last July. Still, if you believe energy stocks will soon break their slump, the XLE is a great way to play the rebound.
Energy Stocks to Buy: Vanguard Energy ETF (VDE)
State Street’s SPDRs aren’t the only sector-specific funds out there, of course. Vanguard sells a similar product of its own — the Vanguard Energy ETF (NYSEARCA:VDE).
While both VDE and XLE tackle the same area of the world, there are a few important differences between the two funds.
First off, VDE’s fees are a hair less than XLE’s. Vanguard’s product has a net expense ratio of 0.12%, while the SPDR fund charges 0.15%. Yes, that’s just 3 basis points, but it is worth noting that if you expect to hold a fund for decades, even basis points can add up over that long a time.
Secondly, the funds actually track two slightly different indices. Vanguard’s VDE tracks the MSCI US Investable Market Index (IMI)/Energy 25/50, while VDE tracks the performance of the S&P Energy Select Sector Index. A few of the differences, as a result: VDE holds 163 stocks vs. XLE’s 41, and while both have roughly equal weights devoted to their top 10 holdings, the rest of VDE’s holdings are much more spread out. Also, VDE has a 20% weighting in Exxon vs. 15.5% for XLE;
While Vanguard’s energy sector fund does have the slight advantage on expenses, portfolio construction has favored the XLE, which has ouperformed VDE in the past one-, five- and 10-year periods.
Energy Stocks to Buy: Load Up on CVX or XOM
ETFs not really your thing? Understandable. I’m more of an old-fashioned stock picking guy myself.
Sure, they might be “boring,” but they’re also beaten down right now, and offer as low-risk a proposition as you’re ever going to find in the stock market today.
On top of that, CVX and XOM are both elite dividend stocks: Chevron has been raising its dividend, which currently yields 4.1%, every year for the past 29 years, while Exxon’s payout has been on the rise for 32 consecutive years. (XOM yields 3.4%.)
If you decide to take a look at one of these two, consider checking out a dividend reinvestment plan, or DRIP. If you’d set up a $10,000 DRIP in XOM stock 30 years ago, it’d be worth more than $400,000 today.
As of this writing, John Divine did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @divinebizkid or email him at firstname.lastname@example.org.