If you want to invest in the energy industry, but you’re not quite ready to become a Texas oil tycoon or install a field of solar panels, you’ve got another option. Energy ETFs make it easy to invest in many energy companies at once.
What is an energy ETF?
An energy ETF is an exchange-traded fund that invests in stocks in the energy sector, which might include oil and natural gas, alternative energy companies such as wind farms or solar panel producers, and utility companies. Currently, the Energy Select Sector SPDR Fund (XLE) is the largest energy ETF with around $25 billion in assets under management.
ETFs are similar to other types of funds in that they offer the benefit of diversification, but unlike mutual funds, they can be bought and sold throughout the trading day. ETFs also tend to be cheaper than other funds.
Best-performing energy ETFs
Below is a list of the best-performing energy ETFs based on year-to-date returns.
YTD returns are based on current price. Data is pulled from Google Finance and may be delayed up to 20 minutes. Information is solely for informational purposes and not for trading purposes or advice. This list excludes energy exchange-traded notes since they are a type of bond, and both inverse and leveraged ETFs since they are riskier than traditional ETFs.
Why invest in energy ETFs
Energy ETFs offer access to energy companies without having to pick and choose stocks yourself. If you want to be a little more selective with your investments, you can look for energy ETFs that suit your personal portfolio. For instance, if you’re interested in sustainable investing, there are clean energy ETFs that focus on renewable energy.
And it may not seem like you’re diversifying if you invest in a sector-specific ETF, but the energy sector is diverse in itself. For instance, in 2020, when oil prices plummeted, renewable energy was starting to get more attention. This intra-industry diversification may create a small safety net within your portfolio.
Of course, having a portfolio overly dedicated to any one industry isn’t diversified enough. If you invest across industries, company size and geography, your portfolio will be better equipped to handle market turbulence.
This will depend on your existing portfolio makeup. Most robo-advisors use between eight and 10 ETFs in their portfolios, but those portfolios typically don’t include individual stocks, bonds or other investments. Learn more about how many funds you should have.
ETFs typically carry less risk than individual stocks because ETFs hold multiple investments. Say you invest in an individual company’s stock. If that company goes out of business, your stock loses its value. If you invested in a fund that held that same company, you’d also be invested in a lot of other companies. Those companies may perform well while that company is failing, thus hedging against potential loss.
Disclosure: The author held no positions in the aforementioned securities at the original time of publication.