What Is an Energy ETF?
An energy ETF is an exchange-traded fund that exposes investors to the energy sector. Energy ETFs track a broad sector index, sub-sector, commodity, or other assets by investing in oil, gas, and alternative energy companies.
Energy ETFs allow investors to diversify their risk by giving them access to a broad range of investments without choosing individual companies. Like stocks, energy ETF shares can be purchased on an exchange.
Key Takeaways
- An energy ETF is an exchange-traded fund that exposes investors to the energy sector.
- They track a broad sector index, sub-sector, commodity, or asset.
- Energy ETFs invest in oil, gas, and alternative energy companies.
- Energy ETFs allow investors to diversify their portfolios and reduce risk.
Understanding Energy ETFs
Exchange-traded funds were introduced in the 1990s and offer individuals an opportunity to diversify their portfolios. Like mutual funds, ETFs expose investors to a basket of securities that track an underlying index, commodity, sub-sector, or asset. ETFs trade on exchanges, which means shares are available for purchase through a brokerage account. Like mutual funds, they can be actively and passively managed.
The energy sector representsa significantpart of the global economy and is evident in the broad market averages like the . Energy ETFs are baskets of securities of oil, gas, and alternative energy companies, including those involved in the exploration, production, distribution, transportation, and manufacturing of energy and related products.
Specialized energy ETFscovera wide range of business types, regions, and risk profiles. There are choices for bothconservative and aggressive investors. The sector encompasses a highlycomplex and sophisticatednetwork of companies involved in the production and distribution of the energy needed to power everyday life and routine business.
1990
The year the world's first ETF, Toronto 35 Index Participation Units, was launched, which traded on the Toronto Stock Exchange (TSX). The first ETF was introduced in the United States in 1993.
Investing in Energy ETFs
By choosing ETFs, investors can diversify their portfolios and reduce risks associated with investing in the energy sector, such as market risk, commodity price risk, and geopolitical risk. ETFs offer the option to choose clean energy ETFs while avoiding traditional energy companies that deal with oil, gas, and coal. Investors commonly use a brokerage account to begin trading.
As of November 2023, 55 energy ETFs traded on the U.S. markets with a total of $82.2 billion in assets under management (AUM), according to ETF.com. The average expense ratio for these ETFs was 0.67%.
The Energy Select Sector SPDR Fund (XLE) is the largest energy ETF and is managed by State Street Global Advisors. As of November 2023, the ETF had $37.7 billion in AUM and a gross expense ratio of 0.10%. Its goal is to provide investors with an"effective representation of the energy sector of the S&P 500 Index." Other popular energy ETFs available on the market as of October 2023 include:
| ETF Name | Ticker Symbol | Assets Under Management | Expense Ratio | Benchmark Index |
| iShares Global Energy ETF | IXC | $3 billion | 0.44% | S&P Global 1200 Energy Sector Index |
| Vanguard Energy ETF | VDE | $9.8 billion | 0.10% | Spliced US IMI Energy 25/50 |
| Fidelity MSCI Energy ETF | FENY | $1.6 billion | 0.084% | MSCI US IMI Energy 25/50 |
| Global X MSCI China Energy ETF | CHIE | $5.4 million | 0.66% | MSCI China Energy IMI Plus 10/50 Index |
| Invesco Solar ETF | TAN | $2.4 billion | 0.69% | MAC Global Solar Energy Index |
What Are the Risks of Investing in ETFs?
ETFsprovide diversification but there are risks to consider. Any specialized sector-based ETF like ones that track energy stocks can add volatility to a portfolio, so it's important to do your research before you make any investment decisions. Reviewingthe prospectus is a prudent move for any investor, especially when considering volatile commodities like energy.
Do ETFs Pay Dividends?
Dividends are treated in two ways by ETFs. Some reinvest the dividends paid out by companies in their portfolios back into the funds. Others pay them out directly to shareholders. In this case, payouts are considered dividends from the ETF—not the companies that issue them. As such, they're disbursed from the fund's total assets.
What Are Renewable Energy ETFs?
Companies that produce energy from solar, wind, and other renewable sources are considered renewable energy companies. ETFs such as the iShares Global Clean Energy ETF(ICLN)invest in these companies.
The Bottom Line
An energy ETF is an exchange-traded fund that exposes investors to the energy sector. ETFs track a broad sector index, sub-sector, commodity, or asset. Investors who choose energy ETFs are exposed to oil, gas, renewable, and alternative energy companies.
Article Sources
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Canadian ETF Association. “Guide to the Canadian ETF Industry - A Road Map.” Pages 4-5.
Vanguard. "History of ETFs."
ETF.com. "Energy ETFs: Overview."
State Street Global Advisors. "The Energy Select Sector SPDR Fund."
iShares. “iShares Global Energy ETF (IXC).”
Vanguard. “Vanguard Energy ETF (VDE).”
Fidelity. “Fidelity MSCI Energy ETF (FENY).”
Global X. “Global X MSCI China Energy ETF (CHIE).”
Invesco. “Invesco Semi-Annual Report to Shareholders.” Page 9.
Invesco. “Invesco Solar ETF (TAN).”
iShares. "iShares Global Clean Energy ETF."
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