In 2017, the S&P 500 returned 21.70%, including dividends paid, but the energy sector did not get the memo. Last year, the Energy Select Sector SPDR (NYSEARCA:XLE), the largest energy exchange-traded fund (ETF) by assets, lost 0.9%, marking the fifth time in the previous six years that the benchmark energy ETF trailed the S&P 500.
That scenario looks poised to repeat this year. As of Sept. 19, XLE is up just shy of 3% year-to-date, well behind the 9.90% returned by the S&P 500. Fortunately for investors interested in the oil patch, some energy ETFs are outpacing both XLE and the broader market. Among the energy ETFs to buy are more nuanced, industry-level plays with exposure to companies with more exciting growth prospects than mega-cap integrated oil giants.
Focused energy ETFs could be investors’ best bets in the energy patch as U.S. oil production soars to record levels. A recent report indicates the U.S., for the first time since 1973, is the world’s largest oil producer, beating even the likes of Russia and Saudi Arabia.
Here are some energy ETFs that investors may want to consider now for potential upside through year-end and beyond.
iShares U.S. Oil & Gas Exploration & Production ETF (IEO)
Expense ratio: 0.43% per year, or $43 on a $10,000 investment.
The iShares U.S. Oil & Gas Exploration & Production ETF (CBOE:IEO) is one of the energy ETFs topping rival diversified funds as well as the broader market as highlighted by a year-to-date gain of just over 13%.
The reason for this year’s resurgence of exploration-and-production equities this year is largely driven by higher oil prices. Historically, exploration and production stocks are usually more sensitive to oil’s gyrations, in either direction, than integrated oil names. The rub is more volatility. IEO’s three-year standard deviation of 25.45% is well above the comparable metric on broad energy ETFs and the S&P 500.
This year, IEO’s annualized volatility is more than 900 basis points above the S&P 500’s. IEO devotes 20.76% of its weight to ConocoPhillips (NYSE:COP) and EOG Resources Inc. (NYSE:EOG).
Alerian Energy Infrastructure ETF (ENFR)
Expense ratio: 0.65% per year, or $65 on a $10,000 investment.
The Alerian Energy Infrastructure ETF (NYSEARCA:ENFR) has a trailing 12-month dividend yield of nearly 3%, making it an ideal way for income-minded investors to approach the infrastructure side of the energy sector.
Master limited partnerships (MLPs) and energy infrastructure companies, including some of the securities held by ENFR, recently got the benefit of some regulatory easing after the Federal Energy Regulatory Commission (FERC) eased a ruling that prevented MLPs from recovering the income tax allowance in the cost of service. FERC has backed off that decision, which was initially met with resistance by financial markets.
With domestic oil production surging and U.S. exports doing the same, the demand for added energy infrastructure assets could be a favorable long-term catalyst for energy ETFs such as ENFR.
Invesco S&P 500 Equal Weight Energy ETF (RYE)
Expense ratio: 0.40% per year, or $40 on a $10,000 investment.
The aim of many ETFs is to be diverse, but that diversity is often threatened in cap-weighted sector funds. Some of those funds introduce stock-level risk by featuring massive exposure to a small number of stocks. That is the case with cap-weighted energy ETFs, which are usually dominated by Exxon Mobil (NYSE:XOM) and Chevron (NYSE:CVX).
The Invesco S&P 500 Equal Weight Energy ETF (NYSEARCA:RYE) refreshes the energy ETF diversity proposition while significantly reducing single-stock risk. There is something to that methodology because the equal-weight RYE is outpacing its cap-weighted rivals this year.
None RYE’s 31 holdings exceed weights of 3.67% and neither Exxon nor Chevron are found among the Invesco fund’s top 10 holdings. The average market cap of RYE’s holdings is $47.18 billion compared to $143.14 billion for the cap-weighted XLE.
VanEck Vectors Oil Refiners ETF (CRAK)
Expense ratio: 0.59% per year, or $59 on a $10,000 investment.
The VanEck Vectors Oil Refiners ETF (NYSEARCA:CRAK) is the first and only ETF to focus on oil refiners. Considering that oil refiners also benefit when oil prices are lower, this energy is delivering a superb 2018 showing with a year-to-date gain of 13.36%.
CRAK, which is just over three years old, targets the Global Oil Refiners Index, “a rules-based, modified capitalization weighted index intended to give investors a means of tracking the overall performance of companies involved in crude oil refining which may include: gasoline, diesel, jet fuel, fuel oil, naphtha, and other petrochemicals,” according to VanEck.
CRAK holds 25 stocks from 15 countries, nine of which are emerging markets. This energy ETF has rebuffed weakness in emerging markets stocks thanks to a combined allocation of 51.49% to the U.S. and Japan.
VanEck Vectors Russia ETF (RSX)
Expense ratio: 0.67% per year, or $67 on a $10,000 investment.
The VanEck Vectors Russia ETF (NYSEARCA:RSX) is the oldest and largest Russia ETF trading in the U.S. No, RSX’s year-to-date decline of 4.86% is not good, but it is more than 600 basis points better than the 2018 loss suffered by the MSCI Emerging Markets Index.
While there are scores of single-country ETFs offering exposure to nations that are major oil producers, sector weights in those funds do not always accurately reflect the local markets’ dependence on energy companies. RSX does. As of Aug. 31, the ETF’s energy allocation was 43.40%, or more than double its second-largest sector weight.
Investors considering RSX should mull over Russia’s often tenuous relationship with the West, and how Russian stocks are often more volatile than broader emerging markets benchmarks and valuations. While Russian stocks often trade at a discount to the MSCI Emerging Markets Index, those discounts often linger for long periods, indicating investors demand for cheap valuations to embrace Russian stocks.
Invesco S&P SmallCap Energy ETF (PSCE)
Expense ratio: 0.29% per year, or $29 on a $10,000 investment.
Consider the Invesco S&P SmallCap Energy ETF (NASDAQ:PSCF) a potential rebound play. At a time when small-cap and energy stocks are rallying, this energy ETF is up a disappointing 2.10% year-to-date.
PSCE’s 33 holdings “are principally engaged in the business of producing, distributing or servicing energy related products, including oil and gas exploration and production, refining, oil services, pipeline, and solar, wind and other non-oil based energy,” according to Invesco.
For risk-tolerant investors, PSCE could be an interesting bet on value stocks bouncing back. Many large-cap value funds feature big weights to energy stocks and PSCF reflects the energy sector’s value proposition.
Nearly two-thirds of this energy ETF’s holdings are classified as small-cap value stocks, meaning the ETF is levered to one of the most potent investment factor combinations.
Global X Norway ETF (NORW)
Expense ratio: 0.50% per year, or $50 on a $10,000 stake.
As was noted earlier with RSX, the Russia fund, there are some single-country ETFs providing exposure to oil-rich nations. For investors considering a developed market fund for that exposure, the Global X Norway ETF (NYSEARCA:NORW) is worth considering.
Energy is one of the biggest sectors in the Norwegian energy market, a fact reflected by NORW. While this is not a pure energy ETF, NORW devotes 34.32% of its weight to energy stocks, more than 1,200 basis points above the fund’s second-largest sector weight.
NORW’s large energy weight does make the fund more volatile on an annualized basis than diversified Europe and ex-US developed markets funds, but the Norway ETF is compensating investors for that risk.
This year, most diversified Europe and MSCI EAFE Index-tracking ETFs are in the red, but NORW is higher by nearly 11%. Plus, this almost-energy ETF yields 2.54% on a trailing 12-month basis.
Todd Shriber does not own any of the aforementioned securities.
