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Are all Energy ETFs Created the Same?


(Note: All data was taken mid-day on 5/11/2016, and is subject to change.)

There are a variety of Energy related ETFs (Exchange Traded Funds) available, but are they all the same?  How do you evaluate them?  

In order to pare down the field of energy-realted ETFs, I went to ETF.com and narrowed my search to the energy sector.  I then took the 10 largest energy ETFs by AUM (Assets Under Management) and compared them.  There are three distinct categories of ETFs in the top ten of the energy space.  The first are ETFs that track publicly traded energy companies.  Out of the top ten, five of them fell into this category, XLE, VDE, FXN, IYE, and IXC.  The second category was not very well represented in the top ten, and that type of ETF tracks companies that do oil and gas exploration.  The single ETF that made the cut in this catagory was XOP.  The last category is made up of ETFs that invest in MLPs, and four of them were represented here, AMLP, AMJ, MLPI, and EMLP. 

The statistics that I looked at for all of these ETFs included AUM, expense ratio, returns on a YTD, 1 year, 3 year, 5 year, and 10 year basis, yield, P/E ratio, number of holdings, methodology, and grade given to them by ETF.com if applicable. You can see the chart by clicking this link.

For the ETFs that track energy companies, 4 tracked only US companies, while one, IXC, tracks a global index.  Four of them were market-cap weighted, while one, FXN, uses a proprietary tiered weighting and selection process.  XLE is by far the largest by AUM, with almost $14 billion in AUM.  It tracks a market cap weighted index of the energy companies in the S&P500.  Because of this, there are only 40 holdings in the fund, and it does not give broad market exposure.  The nature of this fund makes it very concentrated in a few large US companies, and in fact, the two largest companies, Exxon Mobil and Chevron, make up almost 34% of the fund.  This could be looked at as a positive or a negative, depending on what you are trying to achieve in your portfolio.

If diversification is your goal, you are far better owning the Vanguard Energy ETF, which trades under the ticker symbol VDE.  This is also a market cap weighted index, but it covers 98% of the energy companies in the market.  The number of holdings is more than three times that of XLE at 141.  It also has the lowest expense ratio at 10 basis points, and the second highest AUM at $3.7 billion dollars.  The yield is the highest of the group at 3.69%. 

For a little different way to own the energy sector, you could look at FXN.  This fund uses a tiered weighting and proprietary selection process to pick the stocks that make up the portfolio.  Because of this, the expenses are the highest of the 5 at 64 basis points. Looking at the performance YTD, 1 year, 3 year, and 5 year, you would have been better off owning the other ETFs, as it has come in last in performance.  The yield is the lowest of the group at just 1.9%. 

For a little more international exposure in the energy sector, take a look at IXC, which is the only one of the five I looked at that holds foreign energy companies.  Many large energy companies operate all over the world, so this may or may not be important to you, but if you need that exposure, this would be a good way to get it.  The expense ratio is toward the high side at 48 basis points, but the year to date return has been the best of the five at 8.87%. 

If you already have energy exposure, but are looking for exposure in the oil & gas exploration and production side, there is one ETF that made the top 10 largest by AUM, and that is XOP.  This is an equal weight index, it is not measured by market capitalization.  Some would argue that it skews towards small and mid cap companies, but others say that this mitigates risk to your portfolio if one of the larger companies held by the ETF goes out of business.  In this space, especially right now, this is a risk, so I would look at the equal weighting of this index as a positive. 

If you know anything about MLPs, or Master-Limited Partnerships, you know that they have not been looked at very favorably over the past few years.  According to Investopedia, the definition of a MLP is “a type of limited partnership that is publicly traded.”  That isn’t very helpful, but basically, there is a general partner that manages the MLP, and there are limited partners who provide capital and receive periodic income distributions from the MLP.  To be legally classified as an MLP, most of the cash flow must come from real estate, natural resources or commodities. 

The largest ETF that tracks MLPs is AMLP, which has $7.8 billion in investible assets, and pays a 10.79 percent yield.  This ETF holds 25 market cap weighted MLPs, and has a competitive expense ratio of 85 basis points.  The performance of this ETF is right in the middle of the four, but with that yield, I could see this fitting in to some investors income portfolio. 

One alternative to a market cap weighted MLP ETF is EMLP, which is an actively managed group of 37 holdings.  This ETF holds both MLPs and LLCs, which may give it a little more diversification.  The yield is much lower than AMLP at 4.28%, but the performance year to date leads the other four by a wide margin at 12.95% vs. the next closest, AMLP, at 2.36%. 

As always, be sure to consult your fee-only financial planner before making any investment decisions!