Oil and gas exchange-traded funds (ETFs) offer investors more direct and easier access to the often-volatile energy market than many other alternatives. While there is the potential for significant returns by investing in the oil and gas sector, the risks can be high. Oil futures, for example, tend to be volatile and often require a significant initial investment, which excludes many investors. By contrast, oil and gas ETFs offer access to a basket of energy equities, diversifying risk.
While some oil and gas ETFs track futures contracts or commodities prices, the ETFs below are focused solely on stocks.
- The oil and gas sector significantly outperformed the broader market over the past year, fueled by Russia’s invasion of Ukraine, inflation, and other forces.
- The oil and gas exchange-traded funds (ETFs) with the best one-year trailing total returns are PXE, FCG, and IEO.
- The top holding of each of these ETFs is ConocoPhillips for the first and third fund, and DCP Midstream LP for the second fund, respectively.
There are 28 oil and gas stock ETFs that trade in the U.S., excluding inverse and leveraged ETFs as well as funds with less than $50 million in assets under management (AUM). The oil and gas sector, as measured by the S&P 500 Energy sector index, has dramatically outperformed the broader market, posting a total return of 74.4% over the past 12 months compared with the S&P 500’s total return of -11.0%, as of Sept. 1, 2022.
Both gas and oil prices have also risen sharply over the past year. Prices of crude oil, as gauged by the Bloomberg Composite Crude Oil Subindex, have risen 52.1%. Natural gas prices, as measured by the Bloomberg Natural Gas Subindex, have risen 94.2%. These figures are as of Sept. 1, 2022. While these indexes are not benchmarks for stocks of oil and gas companies, they do help to provide context for why these stocks have performed well over the past year.
The best-performing oil and gas ETF, based on performance over the past year, is the Invesco Dynamic Energy Exploration & Production ETF (PXE).
We examine the top three oil and gas ETFs below. The figures below are as of Sept. 1, 2022. In order to focus on the funds’ investment strategy, the top holdings listed for each ETF exclude cash holdings and holdings purchased with securities lending proceeds except under unusual cases, such as when the cash portion is exceptionally large.
- Performance Over One-Year: 91.5%
- Expense Ratio: 0.63%
- Annual Dividend Yield: 1.69%
- Three-Month Average Daily Volume: 318,514
- Assets Under Management: $294.6 million
- Inception Date: Oct. 26, 2005
- Issuer: Invesco
PXE seeks to track the Dynamic Energy Exploration & Production Intellidex index, which is composed of 30 U.S. companies involved in the exploration and production of natural resources used in energy production. The companies within the index are selected based on various investment merit criteria, including price and earnings momentum, quality, management action, and value. The ETF normally invests at least 90% of its assets in the securities comprising the index and provides exposure to companies engaged in the exploration, extraction, and production of crude oil and natural gas. It includes petroleum refineries, companies that gather and process natural gas, and those that manufacture natural gas liquid (NGLs). The fund follows a blended strategy of investing in a mix of growth and value stocks of various market capitalizations.
The top three holdings of PXE are energy exploration and production companies: ConocoPhillips (COP), Pioneer Natural Resources Co. (PXD), and Continental Resources Inc. (CLR).
- Performance Over One-Year: 88.9%
- Expense Ratio: 0.60%
- Annual Dividend Yield: 1.58%
- Three-Month Average Daily Volume: 1,281,839
- Assets Under Management: $958.4 million
- Inception Date: May 8, 2007
- Issuer: First Trust
FCG aims to track the ISE-Revere Natural Gas Index, which is composed of U.S. companies that generate a substantial portion of their revenues from the exploration and production of natural gas. Securities in the index must also satisfy market cap, liquidity, and weighting concentration requirements. The ETF provides exposure to companies involved in natural gas exploration and production. It follows a blended strategy of investing in a mix of value and growth stocks across the market cap spectrum. The fund can act as a leveraged play on natural gas, providing investors significant returns when prices of the commodity rise. But the ETF also is likely to experience significant volatility.
The top three holdings of FCG are DCP Midstream LP (DCP), a midstream company focused on energy logistics, gathering, and processing as well as producing NGLs; Western Midstream Partners LP (WES), which gathers, processes and transports natural gas and oil; and Occidental Petroleum Corp. (OXY), a global energy exploration and production company.
- Performance Over One-Year: 85.0%
- Expense Ratio: 0.39%
- Annual Dividend Yield: 1.96%
- Three-Month Average Daily Volume: 301,025
- Assets Under Management: $1,001.2 million
- Inception Date: May 1, 2006
- Issuer: BlackRock Financial Management
IEO tracks the Dow Jones U.S. Select Oil Exploration & Production Index, which is comprised of U.S. equities within the oil and gas exploration and production sector. The market-cap-weighted ETF provides exposure to companies engaged in the exploration, production, and distribution of oil and gas. Exploration and production companies receive the largest exposure, followed by companies involved: in oil and gas refining marketing and transportation; and oil and gas storage and transportation. The fund follows a blended strategy, investing in a mix of growth and value stocks of various market caps.
The top three holdings of IEO are ConocoPhillips, EOG Resources Inc. (EOG), an energy exploration and development company focused on U.S. reserves; and Pioneer Natural Resources.
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