In Search Of The Best Energy ETF (XLE, XOM, CVX, USO, ERY, ERX)

Shibo Liang: The ETF industry has grown quickly in recent years; there are now more than 1,300 products. In many cases, investors and advisors find themselves with several choices for exposure to a desired asset class or investment strategy. While the options may be generally similar, there are nuances to each that impact the risk profile and ultimately the returns realized [see For ETF Investors, The Details Matter].

One corner of the domestic economy that is a core holding in many portfolios is the energy sector. Whether as a hedge against higher oil prices or on strong global activity, the U.S. energy market can be an appealing investment for a number of different reasons. A number of events such as the oil spill in the Gulf and the European debt crisis have caused some volatility for the energy sector in recent years, with this market swinging between big gains and steep losses.

Perhaps not surprisingly, ETFs have become a popular way to tap into the energy sector. But for investors looking to use ETFs to make a play on energy, the list of available options is quite long. Today we take a look at some popular energy ETFs that offer access to a corner of the market that is capable of both big gains and steep declines in short periods of time:


This product, a part of the family of sector SPDRs, offers access to the largest U.S.-listed energy companies, including firms such as Exxon Mobil, Chevron, and ConocoPhillips.

What’s To Like: XLE offers cheap, liquid access to U.S. energy stocks; this ETF has an expense ratio of just 0.20%, which is among the lowest in the Energy Equities ETFdb Category. And the portfolio of XLE essentially allows investors to own a slice of the domestic energy market, making big allocations to industry giants.

XLE is also extremely liquid; on an average day, more than 25 million shares change hands. For investors looking for quick, efficient execution, XLE will be hard to beat.

What’s Not To Like: This is a top heavy portfolio with (NYSE:XOM) and (NYSE:CVX) making up about 35% of total assets. XLE is also somewhat shallow; with just 43 individual securities, XLE doesn’t include a number of big players in the energy sector. With large caps dominating this portfolio, changes in international factors will have a more significant impact on the returns.

Vanguard Energy ETF (NYSE:VDE)

This fund consists of large, medium, and small U.S. companies tracking the MSCI US Investable Market Energy 25/50 Index.

What’s To Like: VDE’s expense ratio at 0.25% is also very low and is available for commission free trading in Vanguard accounts. Compared with XLE, this ETF has a much deeper portfolio with 170 individual holdings. That balance results in a slightly heavier allocation to small and mid cap companies.

What’s Not To Like: Similar to XLE, this ETF is top-heavy with XOM and CVX making up close to 35% of total assets.

First Trust Energy AlphaDEX Fund (NYSE:FXN)

This fund offers access to the Russell 1000 Index using the AlphaDEX stock selection methodology. The majority of this fund is concentrated in mid and large cap equities.

What’s To Like: This fund implements a quant-based strategy to identify the best energy stocks. For investors who think the AlphaDEX methodology is worthwhile, this ETF might be a good way to tap into the energy sector. Though FXN is considered a passive ETF, some can interpret the use of the AlphaDEX methodology as an attempt to generate alpha relative to cap-weighted benchmarks.

The use of the AlphaDEX methodology results in a balanced portfolio with all holdings accounting for less than 4% of total assets. This is still a shallow portfolio with a total of 56 holdings.

What’s Not To Like: Although historical performance does not indicate future performance, the historical results of this fund are not impressive. The one and three year performance has under-performed the Russell 1000 Energy Index, implying the AlphaDEX methodology does not always add value.

With an expense ratio of 0.70%, FXN is a bit costly compared to its peer group. Investors should consider the cost/benefit relationship between this fund and its methodology.

PowerShares Dynamic Energy Sector Portfolio (NYSE:PXI)

This fund offers a diversified exposure to the energy sector through its holdings while evaluating companies based on a variety of investment criteria.

What’s To Like: Similar to FXN, this ETF is linked to an “intelligent” index that seeks to identify the best performing stocks. For investors looking to do more than simply owning the index, it can be a good choice.

Historically, this fund has been pretty successful at generating alpha during the last three and five year periods; the underlying index has outperformed the S&P Energy Index. The fund’s strategy delivers a balanced portfolio with the top holding accounting for less than 3% of total assets.

What’s Not To Like: Another high expense ratio of 0.65% might deter investors, and the fact that the one year return did not beat the S&P Energy Index reminds us that alpha is by no means guaranteed.

Rydex S&P Equal Weight Energy ETF (NYSE:RYE)

This fund offers a equal weighting allocation to the S&P 500 Energy Index, still capturing firms such as Exxon Mobil, ConocoPhillips, and Chevron.

What’s To Like: The equal weight methodology may be appealing to those concerned about the drawbacks of cap weighting. The fund essentially captures the same stocks as XLE but the equal weighting methodology breaks link between stock price and weighting.

This portfolio is very well balanced, as is expected from equal weight ETFs. The top 10 holdings make up only about 26% of total holdings compared to 63% for XLE.

What’s Not To Like: Although it is a well balanced portfolio, it is still shallow with only 43 holdings. The equal weight exposure makes the fund more expensive at 0.50%, and can potentially be less tax efficient.

PowerShares S&P SmallCap Energy Portfolio (NASDAQ:PSCE)

This fund tracks the US equities in the S&P SmallCap 600 Energy Index.

What’s To Like: Unlike other ETFs on this list, this fund offers exposure to small cap energy stocks that may maintain higher long term growth potential. Investors who are willing to accept the risks of small cap stocks will find interest in this fund.

What’s Not To Like: At an expense ratio of 0.29%, it is a bit more expensive than some other funds. Exposure to large oil companies is absent which may cause this fund to experience high volatility. Two thirds of the fund are also held in the top ten holdings resulting in a imbalanced portfolio.

Focus Morningstar Energy Index (NYSE:FEG)

This fund tracks the Morningstar Energy Index, as seen in in other funds Exxon Mobil, Chevron, and ConocoPhillips are included.

What’s To Like: The cheapest fund at an expense ratio of 0.19% in its category is also eligible for commission free trading in Scottrade accounts. This is very attractive for cost conscious investors. This fund also offers some balance between giant, large, and medium caps. This portfolio offers some depth with a total of 98 holdings.

What’s Not To Like: This top heavy portfolio results in about 35% of the holdings held in XOM and CVX. Trading volumes in FEG are also on the light side; investors should use caution and make use of limit orders when establishing a position.

Written By Shibo Liang From ETF Database Disclosure: No positions at time of writing.

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