Want to pocket some of the profits of Big Oil companies like Exxon Mobil (XOM) and Chevron (CVX) for yourself? Energy exchange-traded funds (ETFs) are among the best and easiest ways to do that—and a whole lot more.
As a general rule, beginner investors don’t need a boatload of different funds in their portfolios. A few core index funds can help anchor your account and build the wealth you want over time. But as you start to get a little more acclimated (and interested in the investing world), you might decide you want to become a little more active—and augment your core holdings with a few “satellite” holdings.
Satellite holdings try to provide a little something extra: performance, income, safety, you name it. They can be individual stocks, but if you want to spread out your risk, you’re better off investing in funds. And one popular type of satellite fund is the sector fund—funds that hold nothing but stocks in a single sector, such as technology, health care, or, in this case, energy.
When people think of the energy sector, they typically think of companies that pull oil or gas out of the ground. And yes, those are energy companies. But there are many other types of energy stocks—firms that transport energy commodities, firms that refine oil and gas into consumer products like gasoline, even firms that work in alternative energy sources such as solar and wind. Because of this, energy can meet several needs—for instance, it can provide high dividend yields to longer-term investors, and it can be a great source of gains for shorter-term traders.
And energy ETFs allow you to enjoy all sorts of different types of exposure to this sector.
Today, I’m going to help you get acclimated by introducing you to three energy ETFs for beginner investors that have three very different investment flavors. Should you buy all three? Almost certainly not. But it’s likely that, if you want to add energy to your portfolio, at least one of these three funds will help you do that in a way that lines up with your other investment goals.
3 Beginner ETFs—Quick Stats
|ETF||Ticker||Assets||Dividend Yield||Expenses||# of Holdings||Top 3 Holdings|
|Energy Select Sector SPDR Fund||XLE||$36.9 billon||3.6%||0.10%||23||Exxon Mobil (XOM), Chevron (CVX), EOG Resources (EOG)|
|JPMorgan Alerian MLP Index ETN||AMJ||$3.0 billion||6.4%||0.85%||23||Energy Transfer LP (ET), Plains All American Pipeline LP (PAA), MPLX LP (MPLX)|
|SPDR S&P Kensho Clean Power ETF||CNRG||$229.4 million||1.4%||0.45%||51||Constellation Energy (CEG), General Electric (GE), Tesla (TSLA)|
|All data is as of 11/9/23|
My Look at 3 Top Beginner Energy ETFs
I picked the following three energy ETFs because they offer three different flavors for beginners looking to dip a toe into the sector. And they share many common elements of the best ETFs for beginners, including lower-than-average fees and straightforward investing goals.
I’ll look at what these funds are, what they hold, and some details about them that could make a difference in your decision to buy.
1. Energy Select Sector SPDR Fund (XLE)
- Assets under management: $36.9 billion
- Dividend yield: 3.6%
- Expense ratio: 0.10%, or $1 annually on a $1,000 investment
What is XLE?
The Energy Select Sector SPDR (XLE) is the largest energy sector ETF by a country mile—it commands five times more assets than the second-largest such fund, the Vanguard Energy ETF (VDE). It’s also been around for a quarter of a century, going live in 1998.
This cheap, simple index fund provides extremely basic exposure to energy (primarily oil and gas) for investors who don’t want to go stock-picking in the sector.
What does XLE hold?
The XLE holds all of the energy-sector stocks in the S&P 500, which at the moment is 23. But not all energy companies are in the same kind of business.
Top holdings Exxon and Chevron are called “integrated” companies, meaning they span upstream (exploration and production), midstream (transportation and storage), and downstream (refining, distributing, and retail). Some holdings are only engaged in one or two “streams”—Phillips 66 (PSX), for instance, doesn’t engage in extracting oil or gas, but it does refine, transport, store, and sell energy products. (Have you seen a Phillips 66 gas station? That’s part of their retail unit.)
What else should you know about XLE?
Here’s a term every beginner investor should know: “cap-weighted.”
Cap-weighted is short for “market capitalization-weighted,” which means that the bigger the stock, the more assets a fund dedicates to that stock. Exxon, at more than $400 billion in market capitalization, is the largest stock XLE holds—and it also enjoys the largest “weight,” at 23% of XLE’s assets. By comparison, $11 billion APA Corp. (APA) is just 0.9% of assets.
Why does that matter? The more of a fund’s assets a stock commands, the more effect its performance has on the fund’s performance. Effectively, Exxon accounts for 23% of XLE’s performance. Chevron, by the way, accounts for another 17%, so that means just two stocks—XOM and CVX—are responsible for 40% of XLE’s returns! This is called “concentration risk,” and it’s something you need to think about whenever you own a fund—if you already own Exxon and Chevron, buying this SPDR energy ETF puts even more weight on those two stocks’ shoulders.
APA, in the meantime, accounts for less than 1%. So even a very big move from APA might not be noticeable in XLE’s performance.
That doesn’t necessarily mean that XLE is bad. SPDR’s energy ETF is different than many other funds in that most of its holdings are all extremely sensitive to one factor: changes in oil and gas prices. That means if XOM moves, chances are that EOG Resources (EOG), ConocoPhillips (COP), and all of XLE’s other holdings are moving in a similar direction. Even if the fund’s assets were more evenly distributed, it might not make all that much of a difference. So despite XLE being extremely imbalanced, it’s actually still a good way to get exposure to the energy sector.
One last note: Dividends from the energy sector are much higher than the market as a whole. XLE yields well more than 3% right now—which is more than double the 1.5% offered up by the S&P 500.
2. SPDR S&P Kensho Clean Power ETF (CNRG)
- Assets under management: $229.4 million
- Dividend yield: 1.4%
- Expense ratio: 0.45%, or $4.50 annually on a $1,000 investment
What is CNRG?
Some investors want more than old, dirty energy—they want new, cleaner energy. And that’s what the SPDR S&P Kensho Clean Power ETF (CNRG) is designed to provide. The clean energy types CNRG targets includes solar, wind, hydroelectric, and geothermal.
CNRG does this by tracking the S&P Kensho Clean Power Index, which itself holds components from two Kensho indexes—the S&P Kensho Cleantech Index and the S&P Kensho Clean Energy Index.
What does CNRG hold?
By tracking two indexes, CNRG provides two somewhat different types of clean-energy exposure with in the same fund. The S&P Kensho Cleantech Index is made up of companies that “offer products and services related to manufacturing the technology for renewable energy,” while the S&P Kensho Clean Energy Index is made up of companies that “offer products and services related to renewable energy.”
They sound really similar, but they’re not at all the same.
The “Cleantech” holdings include companies like Tesla (TSLA) and General Electric (GE) that provide technology in and around clean energy—Tesla, for instance, produces electric vehicles, charging stations, and Powerwall rechargeable lithium-ion batteries, while General Electric, among other things, produces wind turbines for wind energy and aerating turbines for hydroelectric energy.
The “Clean Energy” holdings, for the most part, actually produce the clean energy. They’re utility companies like New York’s Consolidated Energy (ED), which generates some of its electricity via solar, wind, and hydro, or energy companies like Enbridge (ENB), which has renewable energy and power transmission assets including 23 wind farms, 14 solar energy operations, and five waste heat recovery facilities.
All told, CNRG currently holds 51 stocks.
What else should you know about CNRG?
The SPDR S&P Kensho Clean Power ETF uses a quantitative weighting methodology that ensures the biggest companies don’t dictate the fund’s performance. CNRG’s top holding, Constellation Energy (CEG), accounts for just a little more than 4% of assets; no other holding accounts for more than 4% right now.
Also, because of CNRG’s split focus between higher-yielding sectors such as utilities and energy, and “growthier” sectors like technology and industrials, CNRG offers some growth potential and some income potential—but not necessarily a high amount of either.
All in all, CNRG offers a creative and diversified way for beginner investors to access clean energy stocks.
3. JPMorgan Alerian MLP Index ETN (AMJ)
- Assets under management: $3.0 billion
- Dividend yield: 6.4%
- Expense ratio: 0.85%, or $8.50 annually on a $1,000 investment
What is AMJ?
The JPMorgan Alerian MLP Index ETN (AMJ) is an ETF-like fund (more on that in a bit) dedicated to providing access to one small slice of the sector pie: energy master limited partnerships (MLPs).
Master limited partnerships aren’t a type of energy company—they’re an overall business structure that’s applicable to numerous industries. They’re considered “pass-through entities” because income isn’t taxed at the corporate level—it’s “passed through” to owners and “unitholders” (the MLP equivalent of shareholders) via “distributions” (the MLP equivalent of dividends). MLPs can trade publicly just like regular companies, but they also provide some special tax perks because of the nature of these distributions, which we’ll also get to in a moment.
The JPMogan Alerian MLP Index ETN provides exposure to a very specific subset of master limited partnerships—energy MLPs, which typically involve energy’s “midstream”: pipelines, terminals, and storage.
What does AMJ hold?
Technically speaking, AMJ doesn’t hold anything … but again, we’ll get to that in a second.
AMJ tracks the Alerian MLP Index, which is made up of 23 publicly traded energy MLPs. So, like XLE, this is a pretty tight portfolio. Top holdings include the likes of Energy Transfer LP (ET) and Plains All American Pipeline LP (PAA), which boast thousands of miles of pipelines, as well as storage facilities, processing plants, and other midstream energy assets.
What else should you know about AMJ?
You’ve noticed I’ve been a little cryptic about AMJ. Here’s why.
AMJ isn’t an ETF—it’s technically an exchange-traded note (ETN). An ETN is similar to an ETF in that it provides you with the gains (or losses) from an investment strategy, but it doesn’t actually hold the underlying assets. In extremely oversimplified terms, an exchange-traded note is actually a debt security bundled up in an ETF wrapper. You’ll still enjoy returns if the companies in AMJ head higher, and you’ll still be paid dividends. But there is an added risk that if the company issuing the underlying debt (in this case, JPMorgan) gets into extreme financial trouble, that could actually impact the performance of the fund.
Funnily, for as complex as all that sounds, you buy and sell ETNs just like you would an ETF. Your brokerage account experience will be exactly the same.
But why take on that additional risk? Why not just own master limited partnerships outright, or own an MLP ETF?
MLPs tend to generate far-above-average (and even tax-advantaged) income, but they also generate far-above-average taxation headaches. MLP distributions are primarily made up of tax-deferred return of capital, with the remainder typically considered ordinary income. MLPs even require an additional K-1 form come tax time.
MLP ETFs like the popular Alerian MLP ETF (AMLP) cure one of those headaches by providing a 1099 instead of a K-1, but you still have to deal with the split of return of capital and ordinary income.
AMJ has no K-1, and it simply distributes all of its income in the form of a quarterly coupon, which is treated as ordinary income. Sure, you don’t get quite the same amount of yield as you would from AMLP. The ordinary income isn’t as tax-advantaged, either (but you can help yourself by investing in AMJ through a tax-advantaged account like a traditional IRA).
Still, if you’re a beginner investor, there’s a good chance that you’re a novice at taxes, too—and AMJ takes that monkey off your back.
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