The Best Energy ETFs: A Guide for Investors

The energy sector contains everything from oil and natural gas majors, equipment and services firms, and clean and renewable energy companies. Energy exchange-traded funds (ETFs) include dozens of stocks specific to this space to diversify an investment portfolio. The best energy ETFs offer shares of the most popular companies with diversification.

Energy is booming, and in many ways, a country’s energy consumption marks its impact on the world. Moreover, energy usage only continues to climb as new technologies emerge and power grids are brought to remote places. According to Enerdata, global energy demand grew 2.1% in 2022, above the previous decade’s average of 1.4% annually. Robust economic growth will likely drive demand higher.

Hence, it makes sense to have energy equities in a portfolio. However, the sector is volatile, and investing in the best energy ETFs is a prudent plan.

Best Energy ETFs

We discuss the six best energy ETFs. The table from Stock Rover* provides a quick summary along with the star rating. It’s simple to create a watch list to compare funds. We also provide Insight Analyses from Stock Rover for two of the ETFs. More are available on the site.

Invesco Solar ETF

Invesco Solar ETF (TAN) impacts the energy sector through investments in stocks that leverage the sun’s power. It is based on the MAC Global Solar Index. The total expense ratio for investing in this clean energy ETF is reasonable at 0.67%. Net assets are $1.33 billion.

With over 90% of the companies focused on solar energy stocks, this clean energy ETF contains some of the biggest names in the space. Of these solar energy stocks, Invesco Solar’s clean energy ETF includes Enphase Energy Inc. (ENPH), First Solar (FSLR), and SolarEdge Technologies (SEDG), making up nearly 30% of the fund.

Enphase Energy provides homeowners and companies the resources to collect and utilize their solar power. The clean energy company represents 10.85% of the funds in Invesco’s portfolio.

First Solar’s main contribution to the energy sector is panels used in utility-scale photovoltaic (PV) power plants. Making up 10.73% of the fund, First Solar is one of the few clean energy companies that produce these panels in large numbers in America.

SolarEdge Technologies, representing 7.58% of the fund, creates inverters for solar energy systems. These inverters are the essential components that allow solar energy conversion into usable energy.

With electricity prices in constant flux, more companies and households are turning to solar as a more cost-effective alternative energy source. The cost of solar power has dropped nearly 90% through 2020, continuing its downward trend. Projections place the industry at $216 billion by 2030, with a compound annual growth rate of 11.5%.

With the rising solar energy industry, Invesco Solar ETF provides the means to capitalize on the clean energy sector.

Vanguard Energy Index Fund ETF

The Vanguard Energy Index Fund ETF (VDE) holds companies involved almost exclusively in the oil, gas, and coal industries. Drilling down on the holdings about 38% is in integrated oil and gas, ~28% in oil and gas exploration and production, and 10% each in oil and gas equipment & services, refining & marketing, and storage & transportation. It is a large energy ETF with around $9.6 billion in net assets.

Exxon Mobil (XOM), Chevron (CVX), and ConocoPhillips (COP) are the top individual stocks listed in this energy ETF. Of the 115 energy companies involved in the ETF, the ten most significant holdings comprise 65%+ of total assets.

As a result of the merger between two oil giants in 1999, Exxon Mobil expanded its reach and solidified its leadership in the oil and natural gas industry. The firm struggled during the COVID-19 pandemic because of low demand and oil prices but has rebounded. The oil giant is acquiring Pioneer Natural Resources (PXD) to maintain its lead.

Chevron performs oil and gas exploration and production both off the coast and on the mainland in several parts of the world. While the company’s main asset is oil, gas is also becoming more prevalent. The firm recently announced an acquisition of Hess Corporation (HES).

ConocoPhillips (COP) uses its reach to find and produce oil and gas sustainably. The company currently has operations on every continent north of Antarctica.

As expected, crude oil prices have risen since the lows the pandemic but are down from their peak. With crude oil prices trading in a range, many energy companies still see solid revenue and earnings growth, leading to nice investor returns.

Investors will be thrilled to hear that, unlike most other ETFs, Vanguard Energy’s expense ratio is a minuscule 0.10%, making this energy ETF one of the best for those cost-conscious people. Vanguard’s ETFs are well-known for their low fees.

First Trust Natural Gas ETF

First Trust Natural Gas ETF (FCG) is unsurprisingly dedicated to investments in the exploration and production of natural gas. It tracks the ISE-Revere Natural Gas Index. Net assets are a little more than $400 million.

The energy ETF tracks 50 individual stocks, from utility companies to gas exploration and extraction operations. While quite diverse, the top assets under management (AUM) are Hess Midstream LP (HESM), Western Midstream Partners LP (WES), and ConocoPhillips (COP).

Hess Midstream LP is a subsidiary of Hess Corporation (HES). The firm gathers, processes, stores, and exports oil and natural gas in the North Dakota Bakken and Three Forks Shale. It comprises 4.83% of the fund.

Western Midstream Partners LP is an end-to-end natural gas provider. Representing 4.52% of the fund, Midstream is a subsidiary of the number four stock on First Trust’s list, Occidental Petroleum (OXY).

ConocoPhillips produces oil and natural gas, accounting for 3.71% of the funds in this energy ETF. It is one of a few companies operating on six continents, using technology to uncover oil and natural gas in previously thought inaccessible areas.

The expense ratio for this ETF is 0.60%, an acceptable fee for investors. It’s worth noting that anyone investing in this ETF also receives a 3.70% dividend yield.

iShares Global Clean Energy ETF

iShares Global Clean Energy ETF (ICLN) covers a spectrum of green energy solutions. The ETF includes a healthy mix of solar and wind energy stocks at 25% of AUM. Other investments within the ETF include electric utilities and equipment. This BlackRock ETF tracks the S&P Global Clean Energy Index.

Total assets under management amount to over $2.545 billion distributed among 101 different holdings. The three highest weighted holdings are First Solar (FSLR), Vestas Wind Systems (VWS), and Enphase Energy (ENPH), making up around 30% of the fund.

More and more individuals are turning to clean energy to protect the environment. As a result, prices for electricity generated by companies featured in clean energy ETFs will only become more affordable over time.

First Solar is 8.13% of the fund. Its main contribution to the energy sector is panels used in utility-scale photovoltaic (PV) power plants. The company is one of the few clean energy companies that produce these panels in large numbers in America.

Vestas Wind Systems uses wind turbines throughout the United States and Canada as green energy sources. Wind energy gathered serves 1,400 suppliers across the region. At 6.93% of the fund, Vestas is the second stock in the iShares Global Clean Energy ETF.

Enphase Energy’s alternative energy solutions come from the sun. The venture allows companies and homeowners to harness solar power, from powering buildings to charging electric vehicles. It makes up 6.93% of the ETF’s assets.

With an expense ratio of 0.41%, fees for investing are less than most other clean energy ETFs out there.

Global X Renewable Energy Producers ETF

Global X Renewable Energy Producers ETF (RNRG) contains an entire portfolio of clean energy investments among its 43 holdings. It follows the Indxx Renewable Energy Producers Index.

If you’re looking to invest in the renewable energy sector, this ETF provides the means to pick up several stocks in one fund. However, it is concentrated with the top ten holdings constituting ~55% of the ETF. The fund is small, with only ~$44 million in net assets.

As a global clean energy ETF, the list of assets within its ETF holdings comes from around the world. Electrobras, Verbund AG, and Meridien Energy Ltd are the most notable companies on the list.

Electrobras is the largest electric utility in Brazil and Latin America. It is the largest holding at about 7.51%. The company has an array of subsidiaries and invests in partnerships. As a result, Electrobras generates about 40% of Brazil’s electricity. Because it owns many hydroelectric plants, the utility is a major player in renewable energy.

Verbund AG is an Austrian enterprise representing 7.19% of Global X’s assets. The company harnesses the power of wind farms, hydroelectric dams, and solar grids to maximize impact on this energy sector.

Meridian Energy is New Zealand’s most significant electric utility, generating approximately 35% of the country’s power. The utility owns several hydroelectric plants and wind farms. It makes up about 6.83% of this ETF.

Global X has a 0.66% expense ratio that investors are charged to cover administrative fees. The fund now pays a 2.45% dividend yield after pausing it during the pandemic.

ALPS Clean Energy ETF

Most ALPS Clean Energy ETF (ACES) holdings consist of wind, solar, and geothermal stocks. ACES tracks the CIBC Atlas Clean Energy Index. It comprises approximately 20% solar stocks, 17% wind equities, and 10% hydro/geothermal firms. Nearly 20% of the remaining holdings fall into the electric vehicle space.

Each of the 38 stocks is a North American company. The stock list includes popular names like Tesla (TSLA), but also Northland Power (NPI), Enphase Energy (ENPH), and Brookfield Renewable Partners (BEP), are the most significant holdings.

Northland Power taps into the power of the wind both onshore and offshore while also focusing on solar power and efficient natural gas. While based in North America, the company is also investing in resources in South America and Europe. Ranking number one on ALPS’ ETF, it comprises 6.0% of the fund.

Enphase Energy’s alternative energy solutions come from the sun. The venture allows companies and homeowners to harness solar power, from powering buildings to charging electric vehicles. It makes up 5.59% of the ETF’s assets.

Brookfield Renewable is an energy giant based in Canada with around $77 billion in assets. In addition to wind, solar, and hydro energy, the company also has the means to distribute power to consumers. Brookfield encompasses 5.59% of the fund’s total weight.

An expense ratio of 0.55% puts ALPS lower on the fee scale than similar clean energy ETFs in the sector. The fund has about $230 million AUM.

Should You Invest in the Energy Sector?

Energy consumption is only projected to increase as we introduce more technology to an even greater number of people worldwide. Nowadays, a country’s infrastructure is so closely tied to the energy sector that it could almost be one and the same.

There isn’t much question about investing in the Energy sector. The industry has only grown by leaps and bounds over the years, powering our latest gadgets and likely many of our cars soon.

Instead, an investment decision must focus on the top energy ETF to purchase. Traditional gas and oil stocks have been mainstream equities for the past 100 years, but renewable energy sources are also rising as options to invest in.

Like any other opportunity, investors need to take the time to research current and future trends to determine which corner of the market makes the most sense to invest in at any given time. Even in such a well-established sector, failing to do so can result in loss of principal.

Should You Invest in Energy ETFs?

ETFs offer a means to invest in several stocks in a particular sector under one ticker. While some stocks listed in ETFs can be pricey, investing in a fund often provides investors the means to buy those shares for a fraction of the price. Some ETFs can even offer a dividend yield to boost returns further.

With a large number of stocks contained within ETFs, investing can lead to lower volatility and more diversification. If even a handful of holdings perform poorly, the ETF still has several others to keep your investment on track.

Unlike mutual funds, ETFs can be bought and sold throughout the trading day and experience regular changes in share price. So, when an ETF looks like a great buy or reaches a sale threshold, executing a trade is easy.

Energy ETFs allow investors to be in the energy sector. Most energy ETFs are specific to a particular type of energy source and incorporate stocks that fit into that category alone.

Clean energy ETFs focus on companies that generate wind, solar, or geothermal power. Energy ETFs that include only more traditional energy sources, such as oil and natural gas also exist.

Best Energy ETFs: Final Thoughts

There’s no ideal formula for investing in the stock market, and there never will be. That being said, ETFs frequently offer a means to buy many high-profile stocks for a lower cost while providing more diversification.

Energy is at the forefront of our world’s technological revolution. Traditional and clean energy ETFs offer investors a chance to own a piece of this space at a more affordable cost.Like any other investment, be sure to do your own thorough research before making any investment.

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