The energy sector is garnering a lot of investor attention lately. With increasing geopolitical tensions, talks of further OPEC cuts and decreasing production, oil prices are having a good time.

Reason Behind the Appeal

OPEC is scheduled to meet on Nov 30, 2017 to decide on the future of oil production cuts. The markets believe that the OPEC will be extending the output cut deal to 2018 to further stabilize oil prices. Investors breathed a sigh of relief as they appear convinced that member countries are adhering to the OPEC deal.

The impact of hurricanes in the United States led to a decline in U.S. oil production. Declining U.S. drilling activity has provided support to prices. U.S. oil rigs drilling for new production fell to 736 in the week ending Oct 20 compared with 743 in the previous week, per an Economic Times article citing Baker Hughes data.

Moreover, clashes between government forces and Kurdish groups in Iraq have led to supply problems in the world’s second-largest oil producing country. Adding to the agony, President Donald Trump proposed new sanctions on Iran and accused the Middle Eastern country of not adhering to the landmark nuclear deal which imposed curbs on Iran’s nuclear capacity in exchange for freeing assets and easing international trade restrictions. Although still uncertain, oil prices have been rallying on risks of new sanctions on Iran.

Let us now discuss two ETFs focused on providing exposure to energy equities.

Energy Select Sector SPDR Fund (XLE - Free Report)

This fund seeks to provide exposure to energy stocks and tracks the Energy Select Sector Index. It has AUM of $16.5 billion and charges a moderate fee of 14 basis points a year. It has 32 holdings and bears significant concentration risk as over 72% of the assets are allocated to the top 10 holdings.

From a sector look, the fund has exposure to Oil, Gas & Consumable Fuels and Energy Equipment & Services, with 85.4% and 14.6% exposure, respectively (as of Sep 30, 2017). The fund’s top three holdings are Exxon Mobil Corp (XOM - Free Report), Chevron Corp (CVX - Free Report) and Schlumberger Ltd (SLB - Free Report) with 23.9%, 17.5%, and 6.8% allocation, respectively (as of Oct 23, 2017).  The fund has lost 4.0% in a year and 10.5% year to date (as of Oct 23, 2017). XLE currently has a Zacks ETF Rank #4 (Sell) with a High risk outlook.

Vanguard Energy ETF (VDE - Free Report)

This fund seeks to provide exposure to energy stocks and tracks the MSCI US Investable Market Energy 25/50 Index. It has AUM of $3.9 billion and charges a fee of only 10 basis points a year. It has 134 holdings and bears significant concentration risk as over 65% of the assets are allocated to the top 10 holdings.

From a sector look, the fund has high exposure to Integrated Oil & Gas, Oil & Gas Exploration & Production and Oil & Gas Equipment & Services, with 40.1%, 26.7%, and 14.2% exposure, respectively (as of Sep 30, 2017). The fund’s top three holdings Exxon Mobil Corp, Chevron Corp and Schlumberger Ltd with 21.8%, 15.0%, and 6.6% allocation, respectively (as of Sep 30, 2017). The fund has lost 5.9% in a year and 12.6% year to date (as of Oct 2, 2017). VDE currently has a Zacks ETF Rank #4 with a High risk outlook.

Bottom Line

XLE is more popular than VDE, as is evident from its higher AUM. However, VDE may be more appealing to investors, owing to its cheaper expense ratio.  VDE also has a more diversified exposure in terms of number of holdings.

However, XLE has clearly outperformed VDE, both in the year-to-date frame and in a year. With growing optimism about production cuts and relatively less volatility in oil prices, these ETFs might be an attractive bet. However, since the factors driving growth in this sector are still quite uncertain, a more popular ETF like XLE might help alleviate some of the uncertainties prevailing in the sector.