Regardless of how you feel about the oil and gas sector, there is no doubt that energy use is alive and well today. We'll continue to consume oil, natural gas, propane, and many other energy products for the foreseeable future.
Is a green energy transition in the works? Absolutely. However, things like this don't happen overnight. The energy sector may not be growing rapidly like artificial intelligence, and you won't find many of these energy plays on the high-flying NASDAQ. Still, it's certainly large, and companies generate significant cash flow.
As such, investors still want exposure to the oil and gas sector. However, picking individual companies is pretty tough, as the industry is highly volatile.
Instead, many investors look to buy ETFs that track the oil and gas sector in various ways.
You could want to gain exposure to the direct movements of crude oil, natural gas, or some other energy commodity directly. In that case, investing in a crude oil futures contract is difficult, and investors will often end up losing money. However, ETFs now allow even complete beginners to buy and hold individual commodities. We have one of these ETFs listed at the bottom of this article.
Or, you may want to hold energy producers directly. Those that explore for, provide storage for, produce, supply and refine energy products. In that case, there are also a multitude of ETFs you can use to gain exposure.
In this article, I will talk about some of the best oil and gas ETFs you can buy today for exposure to this gigantic industry.
What are the best oil and gas ETFs right now?
- Energy Select Sector SPDR ETF (XLE)
- Vanguard Energy ETF (VDE)
- SPDR S&P Oil and Gas Explorer and Production ETF (XOP)
- iShares Global Energy ETF (IXC)
- United States Oil Fund LP (USO)
Energy Select Sector SPDR ETF (XLE)
The SPDR Energy Select ETF is one of the country's largest oil and gas ETFs and is primarily for those who want exposure to oil and gas producers. It has assets under management of just shy of $38B at the time of writing and has significant liquidity. You'll have zero issues buying in and out of this fund.
The fund is 100% allocated to the energy sector, and its top holdings contain some of the world's largest oil giants. Exxon Mobil (XOM), Chevron (CVX), SLB (SLB), ConocoPhillips (COP), and EOG Resources (EOG) make up the top five holdings.
The fund is heavily concentrated, and a purchase of XLE, at least at the time of writing, is a large bet on Exxon and Chevron. This is because 40% of the fund's assets are invested in these two companies. If we span that out to the top 5 holdings, 55% of the fund is invested in them.
This is a relatively concentrated portfolio, containing only 25 total holdings. It certainly isn't for those wanting broad-based energy sector exposure. It has zero exposure to small caps, and nearly 80% of the portfolio will be large to mega-cap oil and gas producers.
Management fees come in at 0.10%, meaning you'll only pay $1 per $1000 you invest in the fund. This fee is on an annual basis. This is a low expense ratio for a niche-type ETF and is likely because the fund's assets under management are so large. It can afford to charge a lower expense ratio when assets go up.
Regarding dividends, the fund typically yields in the mid-3 % range. Returns haven't been the best. However, it's essential to understand that historical returns from cyclical industries like energy are largely irrelevant. They're more suited for short to mid-term plays to exploit commodity cycles.
Vanguard Energy ETF (VDE)
Unlike XLE, the Vanguard Energy ETF has more holdings in the portfolio and some small-cap exposure. So, it will be a more broad-based ETF that isn't as concentrated on the mega caps.
With an AUM of $8.4B, it's nowhere near the size of XLE, but it's still a very large fund with much liquidity. It's been around for over 20 years, and Vanguard has a rock-solid reputation for producing outstanding funds.
In terms of top holdings, they're identical to XLE. However, the concentration is where it differs. Exxon and Chevron make up only around 32% of the portfolio rather than 40, and the top 5 holdings make up around 47% total versus 55%. The fund uses this spare room to invest in mid to small-cap energy plays.
VDE contains around 10% exposure to small-cap options, bringing an added element of risk and potentially higher returns. Unfortunately, with the overall volatility in the oil and gas market over the years, this small-cap exposure hasn't turned into outsized returns, as it has underperformed XLE. However, as mentioned, past returns do not mean anything about the future, so I felt I'd include an ETF with small-cap exposure to those who may want it.
Management fees come in at 0.10%, and the dividend hovers in the high 3% range.
SPDR S&P Oil and Gas Explorer and Production ETF (XOP)
Full disclosure on this fund before I speak on it. This highly volatile fund is filled with mid to small-cap oil and gas companies involved in oil and gas exploration and refining. It arguably has the highest potential for returns on this list and the highest risk over the short term. Junior energy plays are not for the risk-averse.
If you're comfortable with that risk, then it's certainly a fund you can look at. It's the second SPDR fund on this list but is much smaller, with AUM in the $4B range. With this being a niche ETF, fees are much higher, coming in at 0.35%. You'll pay $3.50 per $1000 you invest in this fund annually.
As mentioned, over 52% of the portfolio is currently allocated to small and micro-cap oil and gas explorers and producers, and only around 22% of the fund is allocated to large-cap companies. As such, we see a much different makeup regarding top holdings.
SM Energy (SM), Texas Pacific (TPL), APA Corp (APA), CNX Resources (CNX), and Ovintiv (OVV) make up the top 5 holdings. However, this is a relatively equal-weighted fund, meaning the top holding doesn't have a much larger allocation than the last holding. In terms of total holdings, this one has 61 at the time of writing.
The dividend is smaller than the funds mentioned above, coming in at 2.61%. However, this is to be expected as many small and micro-cap companies don't pay much of a dividend; they instead invest in exploration and growth efforts.
The long-term returns of this fund are abysmal, as junior producers have generally had a horrible time succeeding over the last decade. However, this fund has been known to skyrocket in value in short-term blips. A prime example is that it grew by over 450% from the bottom of the COVID pandemic to the summer of 2022.
If you're buying this, do so with a high risk/high reward mentality and only if the fund is suitable for your risk tolerance.
iShares Global Energy ETF (IXC)
For the most part, we've discussed North American exchange-traded funds. Now we're going to discuss a fund that still gets you large-scale exposure to the North American oil and gas sector but also has an international element.
The iShares Global Energy ETF aims to track its benchmark, the S&P Global 1200 Energy Capped Index. The fund has assets under management of just under $2B at the time of writing. It has a management expense ratio of 0.44%. This is the highest ratio on this list regarding producer ETFs, so it's important to note that its international exposure comes with a cost. We'll discuss whether that cost has been worth it in a bit.
It has a 70% exposure to North America, and from there, the rest of the portfolio is primarily allocated to European countries like the United Kingdom and France, with a low single-digit weighting towards Australia.
In terms of top holdings, you'll see the same old at the top, Exxon Mobil and Chevron. However, from there, Shell PLC, TotalEnergies, and BP PLC are other companies inside the top 5 holdings.
It even contains some Canadian producers, often touted as the planet's best oil and gas producers, in Canadian Natural Resources and Suncor Energy. It has 69 total holdings, and the top 5 make up around 40% of the fund's assets.
Thus far, international exposure hasn't benefited the fund over the last decade. Performance is relatively flat compared to funds like VDE or XLE. After you factor in the higher fees, the fund has underperformed by a slim margin.
United States Oil Fund LP (USO)
Now that I've shown you a bunch of ETFs related to large-cap, mid-cap, and small-cap oil producers, let's focus on ETFs that can get you individual exposure to the commodity.
Although you can hold a producer ETF for a long time and generally carve out reasonable returns, these ETFs that track individual commodities are not meant to be held for the long term. They're meant to be purchased and sold based on the fluctuating price of oil.
They're essentially speculative bets against the price movements of a particular commodity. If you think oil will go up, you'd buy USO. If you think it will be going down and hold it, you'd sell USO. Holding for the long term will result in underperformance and fees eating away at your balance.
Speaking of fees, the fund has a management expense ratio of 0.6%, which is the highest on this list. However, this can be expected as this is a very specialty ETF. It has an AUM of $1.53B, and being a direct connection to the price of light and sweet crude oil, it pays no dividend.
The fund aims to play the futures market to mimic the oil price movement for investors. Futures contracts are very confusing, and this fund allows an investor to get exposure to West Texas Intermediate (WTI) oil without participating in that market.
Of note, this fund does not give one exposure to Western Canadian Select or Brent Crude. If you'd like an ETF that exposes an investor to Brent Crude, you could check out BNO.
Overall, these five oil ETFs should steer you in the right direction
If you're looking to take advantage of oil prices, whether you see them rising or falling, these ETFs, long or short, can help you do that. The past performance of these ETFs isn't necessarily that important, as commodity plays should be viewed as purchases based on the future results of that commodity.
I generally avoid investing long-term in the sector outside of pipelines due to the volatility and the struggle for long-term returns. However, for those who want to invest on a short to mid-term basis, many have made strong returns out of entering and exiting the oil and gas sector.
