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If you want to invest in the energy industry, but you’re not quite ready to become a Texas oil tycoon or install a field of solar panels, you’ve got another option. Energy ETFs make it easy to invest in many energy companies at once.
What is an energy ETF?
An energy ETF is an exchange-traded fund that invests in stocks in the energy sector. These companies are involved in the exploration, production or management of energy resources, including oil and natural gas, alternative energy companies such as wind farms or solar panel producers, and utility companies.
Currently, the Energy Select Sector SPDR Fund (XLE) is the largest energy ETF with around $25 billion in assets under management.
Energy ETFs are similar to other types of funds in that they offer the benefit of diversification, but unlike mutual funds, they can be bought and sold throughout the trading day. ETFs also tend to be cheaper than other funds.
Best-performing energy ETFs
Data is intended for informational purposes only.
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Why invest in energy ETFs
Energy ETFs offer access to energy companies without having to pick and choose stocks yourself. If you want to be a little more selective with your investments, you can look for energy ETFs that suit your personal portfolio. For instance, if you’re interested in sustainable investing, there are clean energy ETFs that focus on renewable energy.
And it may not seem like you’re diversifying if you invest in a sector-specific ETF, but the energy sector is diverse in itself. For instance, in 2020, when oil prices plummeted, renewable energy was starting to get more attention. This intra-industry diversification may create a small safety net within your portfolio.
Of course, having a portfolio overly dedicated to any one industry isn’t diversified enough. It's a good rule of thumb to invest across industries, company size and geography, so your portfolio is better equipped to handle market turbulence.
» Need to diversify your holdings? Learn more about asset allocation