Battered Energy ETFs Refueling?

After a wild ride last year, it looks like the most obvious choice is the best choice in energy.

Sector Overview

The largest and most dominant is the $14 billion Energy Select Sector SPDR Fund (XLE), which was among the first-ever U.S.-listed sector ETFs to launch (1998). It’s also among the cheapest, with an expense ratio of 0.13%.

The only two energy sector funds to charge less are the $449 million Fidelity MSCI Energy Index ETF (FENY) and the $3 billion Vanguard Energy ETF (VDE), which come with expense ratios of 0.08% and 0.10%, respectively.

The aforementioned funds represent the top three U.S. energy ETFs based on assets, as well as being the three cheapest funds in the asset class, suggesting that investors are paying attention to costs. In fact, FENY—the cheapest of the energy ETFs—is the only one of the top three funds and one of the very few energy ETFs overall to see positive inflows for 2018, gaining $21 million.

The First Trust Energy AlphaDEX Fund (FXN) actually pulled in more assets than the other funds in the asset class, at $85 million, while the biggest loser was XLE, hemorrhaging $1 billion.

Smart-Beta Choices

The U.S. energy ETF space includes several smart-beta strategies, with the largest and oldest being FXN, at $211 million. The idea is that smart-beta strategies should outperform cap-weighted over long time horizons. However, that has not really been the case for smart-beta ETFs in the energy space.

FXN, for example, has an annualized net asset value five-year total return of -13.34%, versus -5.73% for XLE. Over the 10-year annualized horizon ending Jan. 4, 2019, it trails XLE 1.23% to 4.18%.

FXN’s methodology uses a quantitative strategy with tiered weighting that excludes the largest-cap companies. Interestingly, the cap-weighted and small-cap-focused Invesco S&P SmallCap Energy ETF (PSCE) has had dramatically worse performance than its large-cap counterparts, which could help explain FXN’s underperformance.

Similarly, the Invesco S&P 500 Equal Weight Energy ETF (RYE), which assigns equal weights to the entire large-cap energy sector of the S&P 500, was down 10.07% annualized over the three years ended Jan., 4, 2019. However, it outperformed by a hair over that 10-year period, returning 4.2%.

While the Invesco DWA Energy Momentum ETF (PXI), which relies on Dorsey Wright’s relative strength methodology, was down 10.07% over the five-year period, it was up 5.61% during the 10-year period, outperforming XLE. That said, investors should keep in mind that PXI only adopted its current strategy in late 2013, and previously used a different smart-beta approach.

Final Thoughts

Given that the Energy Select Sector SPDR Fund (XLE) is not only the largest and most liquid in its peer group but also one of the top performers over the long term, it’s a good choice if you’re looking for access to the energy market. It’s also low-cost, having the third-lowest price among its competitors.

That said, VDE, IYE and FENY are perfectly acceptable alternatives—the differences between them and XLE are relatively minor unless you’re going strictly by assets under management.

However, if you have a smart-beta approach you truly believe in, there are four other options, and if you think small-caps are the future for energy, there’s always PSCE.

Contact Heather Bell at [email protected]