5 Best Oil and Gas ETFs by 2023 Performance

ETFs that track the performance of crude oil are top performers in the second half of 2023 as Saudi Arabia holds down supply through production cuts. Now is a good time to see a list of the best performing oil & gas ETFs and learn about the different types of funds available in this space.  

What Is an Oil & Gas ETF? 

An oil & gas ETF is an exchange-traded fund that is designed to provide exposure to the oil and gas industry. These ETFs are specifically focused on tracking the performance of companies involved in the exploration, production, refining, marketing and distribution of oil and natural gas.  

Oil & gas ETFs offer investors an efficient way to gain exposure to the energy sector without having to purchase individual stocks of oil and gas companies. 

Types of Oil & Gas ETFs 

Oil & gas ETFs come in various types, each designed to provide exposure to different segments of the oil and gas industry.  

Here are some common types of oil & gas ETFs with examples: 

• Broad energy sector ETFs: These ETFs provide exposure to the entire energy sector, including both oil and natural gas companies, as well as renewable energy companies. They offer a diversified approach to the energy industry. The largest energy ETF is the Energy Select Sector SPDR Fund (XLE). 
• Oil ETFs: Oil-specific ETFs typically track the price of oil by holding futures contracts on crude oil. The largest oil ETF of this kind is the United States Oil Fund LP (USO). 
• Natural gas ETFs: These ETFs concentrate on companies involved in the natural gas industry, including exploration, production and distribution. The largest natural gas ETF is the United States Natural Gas LP (UNG). 
• Oil services ETFs: Oil services ETFs track companies that provide services and equipment to the oil and gas industry. These companies include drilling contractors, rig operators, oilfield services providers and equipment manufacturers. An example of an oil service ETF is the VanEck Vectors Oil Services ETF (OIH). 
• Leveraged and inverse oil & gas ETFs: Some ETFs use leverage or inverse strategies to provide magnified or inverse exposure to the daily price movements of the oil and gas sector. Leveraged ETFs aim to amplify returns, while inverse ETFs aim to provide the opposite performance of the sector. These ETFs are typically designed for short-term trading and are not suitable for all investors due to the risks involved. Examples include the ProShares Ultra Oil & Gas ETF (DIG) and the ProShares UltraShort Oil & Gas ETF (DUG). 
• Master limited partnership (MLP) ETFs: MLP ETFs provide exposure to energy infrastructure companies organized as master limited partnerships. These entities are involved in the transportation, storage and processing of energy commodities, including oil and natural gas. The largest MLP ETF is the Alerian MLP ETF (AMLP). 
• Exploration and production ETFs: These ETFs specifically focus on companies involved in the exploration and production of oil and natural gas reserves. They may exclude other segments of the energy industry, such as refining or services. An example an oil and gas exploration ETF is the iShares U.S. Oil & Gas & Exploration ETF (IEO). 

List of Top Performing Oil & Gas ETFs in 2023

Data as of September 6, 2023.

How to Choose the Best Oil & Gas ETFs 

When evaluating an oil & gas ETF for investment, investors should conduct thorough research and analysis to assess whether the ETF aligns with their investment goals, risk tolerance, and overall portfolio strategy.  

Here are key factors to analyze for choosing the best oil ETFs for your portfolio: 

• Review the ETF’s objective and strategy: Understand whether the ETF invests in equities, futures contracts, or other derivatives. Does it track oil and gas companies, energy infrastructure, or a broader energy sector?  
• Identify the underlying index or benchmark: Assess the ETF’s underlying benchmark index composition, methodology, and relevance to the oil and gas sector. 
• Examine the holdings: Understand which companies and assets the ETF includes, and that the ETF provides exposure to the segment of the oil and gas industry you're interested in. Check the top holdings and their weights within the ETF. A concentrated position in a few stocks can increase risk. 
• Analyze performance history: Review ETF’s historical performance over different time frames and compare them to its benchmark index. 
• Look for lower expense ratio: Assess the ETF's expense ratio, which represents the annual fees and costs associated with the fund. Lower expense ratios can be more cost-effective for investors. 
• Evaluate liquidity: Examine the ETF’s average trading volume and bid-ask spread. Higher liquidity generally leads to tighter spreads and better execution prices. 
• Review dividends and yields: If income is a consideration, check whether the ETF pays dividends. Understand the dividend yield and its historical consistency. 
• Understand risk factors: Consider the risks associated with the oil and gas sector, including commodity price volatility, regulatory changes, geopolitical events and environmental concerns. Assess how the ETF mitigates risk, such as through diversification or the use of derivatives. 
• Consider taxes: Understand the tax implications of investing in the ETF, including potential capital gains distributions and tax treatment of dividends. 

What Is Upstream vs Downstream Oil ETFs? 

Upstream and downstream are two distinct segments of the oil and gas industry, and there are ETFs that specifically target each of these segments. Here's an explanation of upstream and downstream oil ETFs: 

Upstream Oil ETFs

Upstream activities in the oil and gas industry involve the exploration, drilling, and production of crude oil and natural gas. Upstream companies are responsible for finding and extracting these hydrocarbons from the ground. An example of an upstream oil ETF is the SPDR S&P Oil & Gas Exploration & Production ETF (XOP). 

Downstream Oil ETFs

Downstream activities in the oil and gas industry involve the refining, processing and distribution of crude oil and natural gas products. Downstream companies take the raw materials produced by upstream activities and convert them into finished products such as gasoline, diesel fuel, jet fuel and petrochemicals. An example of a downstream oil ETF is the VanEck Vectors Oil Refiners ETF (CRAK). 

Outlook for Oil ETFs in 2023 and 2024

Oil ETFs that track the price of crude oil may be more likely to rise than fall in 2023 and early 2024. Saudi Arabia has planned production cuts through December 2023 and Russia also reduced its exports by 300,000 barrels per day through year-end. Lower supply tends to push oil prices higher, especially when demand remains strong. That said, if a recession begins to look more likely in 2024, oil prices could come back down in anticipation of lower demand. 

Investors should remember that the oil and gas sector can be highly volatile and influenced by various external factors. Careful analysis and ongoing monitoring are essential when investing in oil & gas ETFs to make informed decisions and manage risks effectively.