Best Energy ETFs by Performance

Energy sector ETFs were top performers in 2022, but which will be the best energy ETFs for 2023? We provide a primer on energy ETFs, including their potential benefits and risks, the available types of energy sector funds and details on the top performers through the first quarter of 2023. 

What Is an Energy ETF? 

An energy ETF is a type of investment exchange-traded fund that focuses on companies in the energy sector, such as those involved in oil, gas, coal and renewable energy. The typical energy ETF is designed to track the performance of a specific energy-related index or benchmark, and its value is determined by the combined performance of the underlying stocks held in the fund. 

Energy ETFs provide investors with a way to gain exposure to the energy sector without having to buy individual stocks. They offer a diversified portfolio of energy-related securities, which can help to reduce investment risk. Energy ETFs can also provide investors with the potential for long-term growth, as well as current income, as many energy companies pay dividends to their shareholders. 

Best Energy ETFs for 2023 Based on Performance 

The best energy ETFs for 2023 may come from a range of industries within the sector as the competing interests of OPEC cuts in supply may point to higher prices for oil, yet the potential for lower demand in a weakening economy could be a downer for oil, yet a potential boost for alternative energy sources.

Here are the best energy ETFs based on performance through March 31, 2023. 

Benefits and Risks of Investing in Energy ETFs 

There are many potential benefits of investing in energy ETFs, such as potential for long-term growth and current income. However, before buying shares, investors should weigh the associated risks, such as concentration risk and political and regulatory risk. 

Benefits of Investing in Energy ETFs 

• Diversification: Energy ETFs invest in a broad range of energy companies, which can help to reduce investment risk by diversifying across multiple companies and subsectors within the energy industry. 
• Potential for long-term growth: Energy ETFs may offer investors exposure to the potential for long-term growth in the energy sector, which is driven by global demand for energy and the development of new technologies. 
• Source of income: Many energy ETFs, especially the large caps, pay dividends, which can provide a source of income for investors. 
• Access to specific energy subsectors: Some energy ETFs are designed to track specific subsectors of the energy industry, such as renewable energy, or oil and gas exploration and production. This can provide investors with targeted exposure to a specific area of the energy market. 
• Liquidity: Energy ETFs are traded on stock exchanges, which means they can be bought and sold easily throughout the trading day. 

Risks of Investing in Energy ETFs 

• Volatility: The energy industry can be volatile, with fluctuations in energy prices and changes in government policies and regulations affecting the performance of energy companies. This can result in high levels of volatility for energy ETFs. 
• Concentration risk: Some energy ETFs may be heavily concentrated in a particular subsector of the energy industry or in a few large companies, which can increase the risk of losses if that subsector or company performs poorly. 
• Political and regulatory risks: Energy companies can be affected by changes in government policies and regulations, which can impact their profitability and stock prices. 
• Environmental risks: Some energy companies may face environmental risks, such as the potential for oil spills or environmental damage from coal mining. These risks can impact the financial performance of the companies and the ETFs that hold their stocks. 

Types of Energy ETFs 

There are several types of energy ETFs, which vary in terms of the companies and subsectors they invest in. Here are some of the most common types of energy ETFs: 

• Broad-based energy ETFs: These ETFs invest in a broad range of energy-related companies, including those involved in oil, gas, coal and renewable energy. They typically track an index of energy-related stocks, such as the Energy Select Sector SPDR Fund (XLE) or the Vanguard Energy ETF (VDE). 
• Oil and gas ETFs: These ETFs invest in companies involved in the exploration, production and distribution of oil and gas. They may also invest in companies that provide services to the oil and gas industry, such as drilling and transportation. Examples of oil and gas ETFs include the SPDR S&P Oil & Gas Exploration & Production ETF (XOP) and the iShares U.S. Oil & Gas Exploration & Production ETF (IEO). 
• Renewable energy ETFs: These ETFs invest in companies involved in renewable energy sources, such as wind, solar, hydro and geothermal power. Examples of renewable energy ETFs include the iShares Global Clean Energy ETF (ICLN) and the Invesco Solar ETF (TAN). 
• MLP ETFs: These ETFs invest in master limited partnerships, which are publicly traded partnerships that typically operate in the energy sector, such as those involved in the transportation, storage and processing of oil and gas. Examples of MLP ETFs include the Alerian MLP ETF (AMLP) and the Global X MLP ETF (MLPA). 

Bottom Line 

The best energy ETFs offer investors several benefits including current income and the potential for long-term growth. However, it's important to note that the performance of energy ETFs can be affected by a range of factors, including energy prices, global demand for energy, and government policies and regulations. Therefore, investors should carefully consider their investment goals and risk tolerance before investing.