In this article, we will list the best Energy ETFs that aim to replicate the performance of companies operating within the energy sector, encompassing renewable energy, traditional energy, and associated industries. We will explore the current challenges and opportunities of the energy stock market, delve into the key features and essential characteristics of the leading Energy Sector ETFs and offer a concise overview of the most popular sub-industries and energy stocks held within these 9 top shortlisted ETFs.
Table of Contents
The Impact of the Russian-Ukrainian War on Energy ETFs and Stocks
Over the past recent years, a multitude of significant events have unfolded, some garnering widespread attention while others remained relatively unnoticed. Among these events, the conflict in the Ukrainian region and the pressing environmental challenges have taken centre stage. These issues, alongside various others, have cast a spotlight on the energy industry and its subsidiaries.
The Russian-Ukrainian War exposed Europe’s vulnerability in its reliance on gas supplies, igniting a quest for alternative energy sources. This pursuit, however, initially disrupted the natural gas and oil markets, causing prices of these commodities to soar to unprecedented levels. Consequently, energy providers and oil companies reaped substantial profits, propelling some of these companies to record-high market valuations.
Green Energy: The Sustainability Challenge
Simultaneously, the environmental challenge heightened collective awareness regarding sustainability concerns, prompting a fundamental shift in the strategies of numerous companies toward eco-friendly and less polluting practices.
Despite the considerable efforts and resources allocated to this cause, achieving a seamless green transition remains elusive.
The share of fossil fuels in the world’s energy consumption has been declining gradually since its peak of 94% in 1966, however according to the latest data from BP’s Statistical Review of World Energy1, fossil fuels still accounted for 84.3% of the world’s primary energy consumption in 2020 (33.1% oil, 27% coal, 24.2% gas).
This is primarily attributed to tensions between China and the USA concerning rare earth materials, the absence of comprehensive legislation and infrastructure to support these new energy sources, and the substantial costs associated with this transition. The amalgamation of these factors presents an exceptionally daunting challenge that will undoubtedly test humanity’s resolve.
These transformative changes have shaped the fortunes of some while leading to the decline of others, but overall, they have been a catalyst for companies that prioritize sustainability and those operating within the energy sector. Today, our focus centres on analyzing the most renowned entities with a primary focus on the conventional energy sector.
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The Energy Stock Market
The term “energy ETF” denotes an exchange-traded fund designed to offer investors exposure to the energy sector. Similar to other exchange-traded funds, energy ETFs mirror the performance of a broad sector index, sub-sector, commodity, or various assets by investing in companies related to oil, gas, and alternative energy. But what precisely constitutes the energy sector?
In accordance with the principles outlined by the Global Industry Classification Standard (GICS®), the Energy Sector comprises companies engaged in:
- Exploration & Production,
- Refining & Marketing,
- Storage & Transportation of oil, gas, coal and consumable fuels.
The energy sector classification includes companies primarily engaged in activities such as oil platform construction, drilling equipment supply, and other energy-related services and facilities. It also comprises companies mainly involved in the production and extraction of coal, related products, and other energy-generating consumables.
Best Energy ETFs
1. iShares Global Energy ETF (IXC)
Seeks exposure to companies that produce and distribute oil and gas across the globe. The weight of the securities of any single issuer is limited to a maximum of 25% of the underlying index. The capping methodology limits the sum of the weights of the securities of all issuers that individually constitute more than 5% of the weight of the underlying index to a maximum of 50% in aggregate. To learn more about index weighting, read www.gainshore.com/exchange-traded-funds/
FOCUSED ON LARGE CAPITALIZATION STOCKS – Market Capitalization > $10 Bln
22+ YEARS TRACK RECORD – Fund inception date: 11/12/2001
CONCENTRATED – 52 holdings: 17% Top 1 position / 36% Top 3 / 46% Top 5
GEOGRAPHICALLY biased towards the United States – Top 3 Countries: 60% USA, 12% UK, 12% Canada
BREAKDOWN BY SECTOR:
- Integrated Oil & Gas 55.84%
- Oil & Gas Exploration & Production 21.06%
- Oil & Gas Storage & Transportation 9.95%
- Oil & Gas Refining & Marketing & Transportation 6.70%
- Oil & Gas Equipment & Services 5.46%
- Coal & Consumable Fuels 0.53%
- Cash and/or Derivatives 0.45%
EXPENSE RATIO: 0.44%
Benchmark: S&P Global 1200 Energy 4.5/ 22.5/45 Capped Index
2. iShares MSCI World Energy Sector UCITS ETF (WENS)
Pursues exposure to global energy firms across 23 developed markets by using a tactical investment to seek growth.
FOCUSED ON LARGE and MEDIUM CAPITALIZATION STOCKS – Market Capitalization > $2 Bln
4 YEARS TRACK RECORD – Fund inception date: 17/10/2019
GEOGRAPHICALLY biased towards the United States – Top 3 Countries: 60% USA, 12% Canada, 11% UK
CONCENTRATED – 57 holdings: 16% Top 1 position / 34% Top 3 / 44% Top 5
EXPENSE RATIO: 0.25%
Benchmark: MSCI World Energy Index
3. SPDR MSCI World Energy UCITS ETF (WNRG)
The investment objective of the ETF is to track the performance of companies in the Energy sector, across developed markets globally.
FOCUSED ON LARGE AND MEGA CAPS
7+ YEARS TRACK RECORD – Fund inception date: 04/29/2016
Average Price/Book – 1.85
Average Price/Earnings – 10.1
CONCENTRATED – 57 holdings: 16% Top 1 position / 34% Top 3 / 44% Top 5
EXPENSE RATIO: 0.30%
Benchmark: MSCI World Energy 35/20 Capped Index
4. Xtrackers MSCI World Energy UCITS ETF 1C (XDW0)
Designed to reflect the trend of large and mid-cap companies of globally developed markets, belonging to the energy sector according to the GICS classification.
FOCUSED ON MID AND LARGE CAPS
7+ YEARS TRACK RECORD – Fund inception date: 03/09/2016
GEOGRAPHICALLY biased towards the United States – Top 3 Countries: 63% USA, 12% Canada, 8% Netherlands
CONCENTRATED – 71 holdings: 16% Top 1 position / 34% Top 3 / 45% Top 5
EXPENSE RATIO: 0.25%
BREAKDOWN BY SECTOR:
- Integrated Oil & Gas 52%
- Oil & Gas Exploration & Production 23%
- Oil & Gas Storage & Transportation 10.5%
- Oil & Gas Refining & Marketing & Transportation 8%
- Oil & Gas Equipment & Services 6%
5. Vanguard Energy Index Fund ETF (VDE)
DIVERSIFIED ACROSS SMALL, MID AND LARGE CAPS
19+ YEARS TRACK RECORD – Fund inception date: 23/09/2004
HIGHLY CONCENTRATED despite holding more than 110 securities: 23% Top 1 / 45% Top 3 / 52% Top 5
EXPENSE RATIO: 0.7%
BREAKDOWN BY SECTOR:
- Integrated Oil & Gas 38%
- Oil & Gas Exploration & Production 29%
- Oil & Gas Storage & Transportation 11%
- Oil & Gas Refining & Marketing & Transportation 10%
- Oil & Gas Equipment & Services 9%
- Oil & Gas Drilling 1%
6. iShares Oil & Gas Exploration & Production UCITS ETF (IOGP)
The Index includes only oil and gas companies listed in developed markets, meeting market capitalisation and liquidity requirements. The weighting of companies in the Index is based on free-float adjusted market capitalisation, with a maximum weighting of 10% for each component.
+16 YEARS TRACK RECORD – Launched in September 2011
GEOGRAPHICALLY biased towards North America and Australia – Top 3 Countries: 67% US, 19% Canada, 8.8% Australia
MORE DIVERSIFIED THAN OTHER ENERGY ETFs – 97 holdings: 10% Top 1 / 29% Top 3 / 43% Top 5
EXPENSE RATIO: 0.55%
7. Invesco S&P World Energy ESG UCITS ETF (WDEE)
The Index reflects the performance of large and mid-cap energy companies in developed markets, with the aim of improving their ESG profile (Environmental, Social and Governance) and reducing the carbon footprint compared to the S&P Developed Ex-Korea LargeMidCap Energy. The Index periodically excludes securities involved in economic activities such as tobacco, controversial weapons, tar sands, small arms, military orders and thermal coal, as well as those classified as Not Compliant with the principles of the UN Global Compact (UNGC).
RECENTLY LAUNCHED – April 2023
GEOGRAPHICALLY biased towards North America and the UK – Top 3 Countries: 63% US, 11% Canada, 9% UK
THE ENERGY ETFs WITH THE LOWEST NUMBER OF HOLDINGS: 35
EXPENSE RATIO: 0.18%
8. Amundi S&P Global Energy Carbon Reduced UCITS ETF (WEL5)
Exposed to large and mid-cap companies in developed countries, incorporates exclusion criteria on tobacco, controversial weapons, civilian and military small arms, thermal coal, oil and gas, tar sands, and shale gas. It is also designed to select and repost companies to improve sustainability and ESG profiles collectively, achieve environmental goals and reduce the carbon footprint.
FOCUSED ON MID AND LARGE CAPS
HIGHEST GEOGRAPHICAL EXPOSURE TO US STOCKS – Top 3 Countries: 55% US, 12% UK, 11% Canada
EXPENSE RATIO: 0.18%
9. FIDELITY MSCI ENERGY INDEX (FENY)
The Index includes only oil and gas companies of the MSCI USA IMI Energy 25/50 Index, meeting market capitalisation and liquidity requirements. The weighting of companies in the Index is based on free-float adjusted market capitalisation, with a maximum weighting of 10% for each component.
10 YEARS TRACK RECORD
US STOCKS ONLY
MORE THAN 120 HOLDINGS BUT VERY CONCENTRATED AS TOP 2 WEIGH ~ 40% AND top 10 66.5%
EXPENSE RATIO: 0.55%
Questions & Answers
What is the most diversified Energy ETF?
The iShares Oil & Gas Exploration & Production UCITS ETF (IOGP) is the most diversified Energy ETF in terms of top positions maximum weighing, while the FIDELITY MSCI ENERGY INDEX (FENY) is the Energy ETF with the highest number of holdings (>120).
What Energy ETFs had the highest annualized performance since inception?
The iShares MSCI World Energy Sector (WENS) had the highest 3-year annualized performance at about 32.9% as of Q3 2023.
The SPDR MSCI World Energy UCITS ETF (WNRG) exhibits the highest cumulative return since 2017 (~ +52%).
What is the Energy ETF exhibiting the lowest volatility?
With a ~ 27% annualised standard deviation, the Xtrackers MSCI World Energy had one of the lowest 3-year volatility of returns.
What is the Energy ETF with the lowest expense ratio?
The cheapest Artificial Intelligence ETF is the FIDELITY MSCI ENERGY INDEX (FENY), with an annual expense ratio of just 0.10% (we are still verifying if such a low TER is ever possible).
However, funds’ expenses shall not be the first thing to evaluate when comparing funds and ETFs; learn why here: https://www.gainshore.com/investment-research/#fund
What are the most liquid Energy ETFs?
The FIDELITY MSCI ENERGY INDEX (FENY) ETF and the iShares Global Energy ETF (IXC) present the highest trade volume among all energy ETFs.
What are the most recurring stock holdings in Energy ETFs?
- Exxon Mobil Corporation (XOM)
- Chevron Corporation (CVX)
- Shell plc (SHEL)
- ConocoPhillips (COP)
- Schlumberger Limited (SLB)
- EOG Resources, Inc. (EOG)
- Canadian Natural Resources Limited (CNQ)
What percentage of the portfolio shall be allocated to Energy ETFs and Energy stocks?
In our opinion, Energy ETFs are extremely volatile, so an allocation of 10% would avoid too much exposure to energy commodities risks. On the other hand, we live in a world that continues to be heavily dependent on energy, oil and gas; from this perspective, solid companies in the conventional oil & gas sector will keep making tonnes of money out of people’s and governments’ pockets. This partially explains why countries like Saudi Arabia and the Emirates have endless funds to shop around football clubs, players and coaches. Read also why and how to invest in football stocks
Investing in ETFs reduces the risk of being overexposed to one or few entities, while to achieve superior returns, one shall carefully select only the best stocks among the entire universe of stocks falling under the Energy sector. Read more here: https://www.gainshore.com/exchange-traded-funds/#downsides-of-et-fs
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Author: Giacomo Cappello, student of Luiss Guido Carli Business Economics School and financial analyst intern at Gainshore.
Co-author: Dario Inclimona, Gainshore’s head of investment research.
SOURCES:
https://en.wikipedia.org/wiki/Global_Industry_Classification_Standard
https://www.ssga.com/library-content/products/factsheets/etfs/emea/factsheet-emea-it-wnrg-na.pdf
https://www.ssga.com/library-content/products/factsheets/etfs/emea/factsheet-emea-it-wnrg-na.pdf
https://digital.fidelity.com/prgw/digital/research/quote/dashboard/summary?symbol=FENY
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Disclaimer: Nothing in this write-up is financial advice. Gainshore’s founder, partners, and employees may hold long or short positions in some or all the stocks and ETFs mentioned in this article. This article was written by Gainshore and expresses our own opinion. Gainshore has no business relationship with any company whose stock or ETF is mentioned in this write-up.
Before making any investment, potential investors should do their own proper due diligence on any name directly or indirectly mentioned in this article. Investors should also consider seeking advice from a broker or financial adviser before making investment decisions. Any material in this article should be regarded as general information and not relied on as a formal investment recommendation
