Energy stocks and exchange-traded funds (ETFs) were a popular bet heading into 2022. So far, so good – the sector has been by far and away the best performer as the end of the year nears.
The S&P 500 Energy Index delivered a massive total return (price plus dividends) of 58% through early December, driving numerous attached energy ETFs higher. Compare that to a negative total return for the S&P 500 and seven of its sectors, and low-single-digit gains for the remaining three, and it’s not even close.
But after a 2022 like that, what chance do energy ETFs have of repeating in 2023?
The past year will be (hopefully) almost impossible to replicate. Russia’s war with Ukraine, higher travel demand and other drivers sent U.S. crude oil prices from around $75 at the start of 2022 to multiple peaks above $120 across the year.
Still, certain sparks – including any eventual let-up of Chinese COVID prevention measures, as well as continued conflict in Ukraine – could sustain a floor under oil prices.
Carrie King, global deputy chief investment officer at BlackRock Fundamental Equities, says among cyclical sectors, her firm favors energy (and financials) in 2023: “We see energy sector earnings easing from historically elevated levels yet holding up amid tight energy supply,” she says.
Will energy repeat as the S&P leader in the coming year? The odds are against it. But there is reason to believe energy funds still have more gas in the tank. So if you want to add exposure to the sector, here are our eight best energy ETFs to buy for 2023.
Data is as of Dec. 6. Yields represent the trailing 12-month yield, which is a standard measure for equity funds.
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Energy Select Sector SPDR Fund Assets under management: $40.2 billionDividend yield: 3.4%Expenses: 0.10%, or $10 annually on a $10,000 investmentEvery conversation about energy ETFs rightfully should begin with the Energy Select Sector SPDR Fund (XLE (opens in new tab), $85.32) – the largest such exchange-traded fund on the market by a country mile. At $40 billion, XLE has roughly five times as much in assets under management than No. 2, the Vanguard Energy ETF (VDE (opens in new tab), ~$8 billion in AUM).
XLE, which will celebrate its 25th birthday next December, is pretty straightforward: It’s a collection of the (currently 23) energy-sector stocks found within the S&P 500. Translation: You’re getting a concentrated heap of big, blue-chip, U.S.-based oil-and-gas exposure.
Notably, though, you’re getting an outsized amount of exposure to two stocks: Exxon Mobil (XOM (opens in new tab), 23% weighting) and Chevron (CVX (opens in new tab), 20%) that combine to account for well more than 40% of XLE’s assets.
Concentration risk is a serious concern for many ETFs – if one or two stocks account for so much of the portfolio, how much diversification are you really getting, after all? But that’s admittedly less of a concern in energy, where most stocks (large and small) ebb and flow based on the underlying commodity prices. In fact, you could argue that the heavy allocations to Exxon and Chevron act as ballast because parts of these integrated majors’ businesses can still profit even when oil prices aren’t rising.
Clearly, though, a rising commodity tide lifts most of XLE’s boats. The fund was up 54% as of early December.
Learn more about XLE at the SPDR provider site. (opens in new tab)
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Fidelity MSCI Energy ETF Assets under management: $1.6 billionDividend yield: 3.0%Expenses: 0.084%Some fund investors simply prefer to choose the least expensive fund on offer, and in the energy sector, that’s currently the Fidelity MSCI Energy ETF (FENY (opens in new tab), $23.33).
The good news: With FENY, you don’t get less for your money – you get more. This Fidelity ETF tracks the MSCI USA IMI Energy Index, which results in nearly 120 holdings versus just more than 20 for the XLE.
Past that, though, you’re getting a similar flavor of exposure to XLE. This is a predominantly large-cap index mixed with mid-teens exposure to mid-cap stocks. You’re also getting quite a bit of Exxon and Chevron, at 22% and 16%, respectively – less than XLE, sure, but still considerable overweights. Other holdings include the likes of ConocoPhillips (COP (opens in new tab), 8% weight), EOG Resources (EOG (opens in new tab), 4%) and Schlumberger (SLB (opens in new tab), 4%).
The Fidelity energy ETF’s fee difference versus XLE isn’t massive either, at a mere 1.6 basis points. But you’re ultimately getting a wider swath of stocks for less, which makes FENY worthy of consideration.
Learn more about FENY at the Fidelity provider site. (opens in new tab)
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Invesco S&P 500 Equal Weight Energy ETF Assets under management: $580.0 millionDividend yield: 2.7%Expenses: 0.40% If these massive allocations to Exxon and Chevron make you a little nervous, there’s a way to get diversified energy exposure that’s much more evened out.
Funds such as XLE and FENY are weighted by market cap, which means the bigger the stock, the more of it they hold in their portfolios. However, while many sector funds are weighted this way, a few aren’t: including the Invesco S&P 500 Equal Weight Energy ETF (RYE (opens in new tab), $71.96).
Like XLE, the RYE invests in the S&P 500 Energy Index, which means a current portfolio of the same 22 stocks. But instead of weighting them by market cap, RYE starts every stock off at the same weight each quarter. The stocks might move up or down over the next three months, but regardless of how big or small they’ve gotten, RYE will simply rebalance them at the same weight come the following quarter.
Right this second, then, Exxon Mobil is still a top-10 holding, but at under 5% of assets. Schlumberger (SLB (opens in new tab)) and Halliburton (HAL (opens in new tab)) – which combined are worth $100 billion, versus Exxon’s $450 billion – are the only two holdings currently above 5%.
Again, most energy stocks move along with oil and gas prices, so RYE’s performance is often similar to XLE’s. Still, if you want to rest easy knowing you’re not carrying any excess single-stock risk, this Invesco fund will do the trick.
Learn more about RYE at the Invesco provider site. (opens in new tab)
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iShares Global Energy ETF Assets under management: $2.1 billionDividend yield: 3.5%Expenses: 0.40% Energy inflation isn’t a purely American phenomenon. The rest of the world has been suffering from higher oil and gas prices … and many international oil giants have profited along with their U.S. brethren.
The largest, most liquid fund covering a wider world of energy equities is the iShares Global Energy ETF (IXC (opens in new tab), $39.09) – a $2-billion-plus portfolio of 52 companies that dominate global energy production, refining, storage and other industries.
“Global” is the keyword here – it means the fund includes both domestic and international equities. The official breakdown is U.S. 60%/rest of world 40%, with the U.K. (12%), Canada (11%) and France (5%) representing the top non-American country weights.
Exxon and Chevron still lead the way here, at 16% and 11% weights, respectively. But you’re also getting significant exposure to international energy giants including Britain’s Shell (SHEL (opens in new tab), 8%) and BP (BP (opens in new tab), 4%) and France’s TotalEnergies (TTE (opens in new tab), 5%).
It’s worth noting that in both the short- and long-term alike, U.S.-based energy stocks have outperformed their international peers. But if you’re looking to defray a little geographic risk, this energy ETF can do so while still printing a nice profit from higher global commodity prices.
Learn more about IXC at the iShares provider site. (opens in new tab)
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iShares Global Clean Energy ETF Assets under management: $5.3 billionDividend yield: 1.3%Expenses: 0.40%All of the best energy ETFs on this list have so far covered traditional energy – namely, oil and natural gas. But clean energy is another avenue for potential growth that investors shouldn’t ignore.
In BlackRock’s 2023 outlook, Hannah Johnson, portfolio manager, natural resources, for BlackRock Fundamental Equity, says “Our research suggests the global transition (to net-zero carbon emissions) could accelerate, boosted by significant climate policy action, by technological progress reducing the cost of renewable energy and by shifting societal preferences as physical damage from climate change – and its costs – become more evident.”
And as far as clean energy goes, investors might want to take a global tack.
“Europe has intensified its efforts to build clean energy infrastructure as it seeks to wean itself off Russian energy. The clearest example of that is the European Commission’s RePower EU Plan,” Johnson adds. “Further impetus is likely to come from higher traditional energy prices, which are exacerbating the cost-of-living crisis and have shifted the economics decisively in favor of cleaner energy resources.”
With both those goals in mind, investors might consider the iShares Global Clean Energy ETF (ICLN (opens in new tab), $20.56) – a juggernaut in its own right as the largest clean-energy ETF and the fourth-largest energy ETF overall, hoovering up more than $5 billion in assets since its 2009 inception.
In lieu of traditional oil-and-gas names, ICLN is a diversified portfolio of 100 holdings across numerous industries, including semiconductors and semiconductor equipment (27%), electric utilities (22%), renewable electricity (19%), heavy electrical equipment (11%) and others that produce or otherwise provide technology or infrastructure for cleaner energy.
Individual stocks include the likes of California-based residential and commercial solar firm Enphase Energy (ENPH (opens in new tab)), Spanish multinational electric utility Iberdrola (IBDRY (opens in new tab)) and Danish wind turbine manufacturer Vestas Wind Systems (VWDRY (opens in new tab)).
Green energy and traditional energy often move in different directions, and indeed, ICLN was basically breakeven in 2022 while oil and gas were off to the races. And again – 2022’s higher traditional-energy prices could spur further investment in cleaner technologies, setting energy ETFs like ICLN up for a more fruitful 2023.
(Note: If you’re looking for a strong U.S.-specific clean-energy ETF, consider the SPDR S&P Kensho Clean Power ETF (CNRG (opens in new tab)), which charges 0.45%, has a 5-star Morningstar rating and has a Bronze Morningstar analyst rating.)
Learn more about ICLN at the iShares provider site. (opens in new tab)
XOP is an “equal weight” fund, which means it rebalances regularly to ensure no single position represents an outsized part of the portfolio – regardless of how big an individual holding is, or how different the pieces of this fund perform on its own. Or more precisely, right now stocks like $146-billion oil giant ConocoPhillips (COP (opens in new tab)) stand side by side with lesser-known $5-billion explorer Denbury (DEN (opens in new tab)).
The fund is up about 40% so far this year thanks to rising oil and gas prices, proving that you don’t have to sacrifice performance when you take a truly diversified approach like this. But keep in mind that integrated oil giants like Exxon, MLPs that are far focused on infrastructure, and alternative energy stocks don’t make it on the list at all. This is a pure play on exploration and production – meaning that in many ways, it’s a pure play on oil and gas prices.
Learn more about XOP at the SPDR provider site. (opens in new tab)
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SmartETFs Sustainable Energy II ETF Assets under management: $5.4 millionDividend yield: 2.7%Expenses: 0.79%The past few years has seen a vast expansion in actively managed ETFs, and that brings us to the SmartETFs Sustainable Energy II ETF (SOLR (opens in new tab), $29.98).
SOLR, which is actively managed and fully transparent, is an equally weighted fund with 30 positions. While the ticker would seem to indicate a solar tilt, it generally invests ‘in companies poised to benefit from the shift to sustainable energy,’ whether that’s actually producing alternative or renewable sources of energy, or otherwise making these kinds of energy more efficient and/or accessible.
Top holdings include some of the stocks mentioned in ICLN, such as Iberdrola and Enphase. At No. 1 currently is American solar mainstay First Solar (FSLR (opens in new tab)) and renewable-energy utility NextEra Energy (NEE (opens in new tab)).
SOLR is both young and small – it went live Nov. 11, 2020, and has since only cobbled together a little more than $5 million in assets – but it has its draws. This fund is actually a ‘twin’ of the Guinness Atkinson Alternative Energy Fund (GAAEX), which launched in 2006, and is run by GAAEX’s three managers: Will Riley, Jonathan Waghorn and Edward Guinness.
Moreover, Morningstar has seen fit to give Sustainable Energy II ETF a Gold analyst rating.
‘Overall, SmartETFs benefits from a strong investment culture, earning it an Above Average Parent Pillar rating,’ Morningstar says. ‘A contributing factor to the firm’s favorable rating is its impressive track record of endurance. The SmartETFs 10-year success ratio is 100%, meaning that over the period, 100% of its products have survived and beaten their respective category median. A high success ratio not only indicates good performance but also provides insight into a firm’s discipline around investment strategy and product development.’
Learn more about SOLR at the SmartETFs provider site. (opens in new tab)
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Alerian MLP ETF Assets under management: $6.4 billionDividend yield: 7.3%Expenses: 0.87%Income-minded investors might prefer our next pick to many of the other still-generous dividend payers on this list.
The Alerian MLP ETF (AMLP (opens in new tab), $38.32) is interested in a special subsector of energy: master limited partnerships (MLPs). Now, master limited partnerships themselves are merely a business structure – one that pairs the benefits of publicly traded equity with some special tax perks.
From contributor Aaron Levitt:
‘”MLPs, which first began to form in the 1980s, are a type of ‘pass-through entity.’ That’s because their income isn’t taxed at the corporate level, and is instead ‘passed through’ directly to owners and investors via dividend-esque ‘distributions.’ This system typically results in much-higher-than-average yields, often in the 7%-9% range.”
However, as it pertains to the sector, most energy MLPs tend to relate to infrastructure: pipelines, terminals, storage and other facilities that make up the energy supply chain. AMLP’s holdings, for instance, include the likes of:
Energy Transfer LP (ET (opens in new tab)), with 120,000 miles of nationwide energy infrastructurePlains All American Pipeline LP (PAA (opens in new tab)), which is responsible for transportation, terminalling, storage and gathering assets in key crude oil and natural gas liquid (NGL)-producing basins and transportation corridors in the United States and CanadaMagellan Midstream Partners LP (MMP (opens in new tab)), which transports, stores and distributes petroleum productsThese types of companies typically feature much higher yields than exploration-and-production, refinery and distribution companies – evident in AMLP’s juicy 7%-plus yield.
One benefit of holding MLPs through the AMLP energy ETF is that you can avoid the K-1 tax form that’s typically required when unitholders receive MLPs’ pass-through income (referred to as distributions). AMLP processes the K-1 forms and instead distributes a basic 1099 to shareholders instead. But do consider consulting your tax advisor when deciding how to invest in MLPs.
Learn more about AMLP at the ALPS Advisors provider site. (opens in new tab)
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United States 12 Month Oil Fund LP Assets under management: $91.4 millionDividend yield: 0.0%Expenses: 0.90%Most of the best energy ETFs only allow you to gain exposure to changes in energy prices via energy stocks. But a few funds allow you to invest in another way: energy futures.
The largest such fund is the United States Oil Fund LP (USO (opens in new tab)), which tracks the price of West Texas Intermediate (WTI, aka U.S. crude oil), but numerous weaknesses were exposed when oil prices went negative during the COVID crash of 2020, forcing the ETF to change its investment structure multiple times. It previously only invested in “front-month” futures, forcing it to constantly sell contracts about to expire and replace them with futures expiring in the next month – which resulted in disastrous results during 2020’s oil plunge. Subsequent changes allowed it a little more flexibility to invest in longer-dated contracts.
We prefer a related way to track oil: USO’s little brother, the United States 12 Month Oil Fund LP (USL (opens in new tab), $33.27). USL, like USO, invests in futures, but it does so with not only front-month contracts, but also contracts for the following 11 months – so basically, across 12 months of futures instead of just a couple. This strategy historically has produced much more similar gains for USL to actual spot oil prices than USO.
Just know USL’s weaknesses. While it’s a more direct play on oil prices, it still won’t perfectly track WTI, and you won’t receive dividend income like you will with so many of the other energy ETFs on this list.
(Note: If you want to play natural gas in a similar manner, USCF also offers the United States 12 Month Natural Gas LP (UNL (opens in new tab)), at a 0.90% expense ratio.)
Learn more about USL at the USCF provider site. (opens in new tab)
The big returns come with a higher risk profile, however. Futures markets do not function the same way as stock markets do, and come with a unique volatility based on supply and demand dynamics. There’s also a significantly higher cost structure to account for, as UNG’s expense ratio is 10X some of the low-cost index funds on this list.
Still, with UNG up so much this year and with no end in sight to gas supply disruption, investors may want to consider this smaller and more tactical energy ETF.
Learn more about UNG at the USCF provider site. (opens in new tab)
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