The Wide(r) World Of Energy ETFs

The energy sector is a critical part of the US and global economy and this slice of global markets deserves a spot at the asset allocation table. But as an investment it’s been a disappointment in recent years… or has it?

Your definition of the energy sector matters… a lot. Although the conventional classification of energy stocks has fallen on hard times, this corner of equity markets encompasses a wide variety of companies beyond the standard choices. Conveniently, the sector’s rapid evolution in recent years has been captured to a large degree in ETFs.

ETFdb.com lists nearly 80 ETFs in the energy space and while the usual suspects populate the list there are also many portfolios that target the expanding array of alternative and niche industries. Energy equity beta, in other words, comes in many flavors, providing investors with a diverse set of risk factors via ETFs.

As a brief introduction into the possibilities, let’s review a subset of ETFs on ETFdb.com’s list and compare the results with what is arguably a conventional energy benchmark: Energy Select Sector SPDR (XLE), the largest energy ETF by far that’s dominated by the familiar big-oil names, including Chevron (CVX), ExxonMobil (XOM) and ConocoPhillips (COP).

The main investment theme for XLE and the biggest oil/energy stocks in recent history is an ongoing bearish trend. Over the past three years through yesterday’s close (Oct. 13), for example, XLE is down roughly 10% a year on an annualized basis vs. a 14%-plus annualized gain for US shares overall via SPDR S&P 500 (SPY).

The good news from a portfolio-design perspective is that XLE is far from the last word on energy stocks. Let’s explore this point in a bit more detail with a diverse set of energy ETFs and compare the results against the XLE benchmark.

The funds above represent a broad range of new and old energy industries. Not surprisingly, performance varies—dramatically. For instance, since the end of 2015, the top performer on our list is Invesco WilderHill Clean Energy (PBW), which has surged in recent years. A $1 investment in the fund at 2015’s close would have grown to more than $3 through yesterday’s close. By contrast, the same dollar invested in XLE over that span would be worth about 60 cents.

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Disclosure: None.

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