Exchange-traded funds (ETFs) are like a basket of stocks, bonds, or other securities that you can buy and sell just like a single stock on the stock market. Instead of diving deep and picking individual stocks one by one, you can grab an ETF and instantly own a slice of many different investments. They’re a hit with many investors because they’re straightforward to trade, often have lower fees than other investment options, and give you a way to spread your bets across different areas. Plus, they often come with tax advantages, making them a savvy choice if you’re looking to grow your money.
In recent years, ETFs have gained immense popularity among investors for two primary reasons:
Although some ETFs might not be the best investment for your financial situation, other ETFs, like the ones outlined below, are considered great investments.
Key takeaways
All three of the top-performing ETFs mentioned above are linked to energy commodities that have significantly outperformed the S&P 500 Index in the past year. Although not formal benchmarks, the Bloomberg Composite Crude Oil Subindex and Bloomberg Natural Gas Subindex have shown returns of 49.4% and 53.6% for oil and natural gas, respectively. In contrast, the S&P 500 provided a total return of -10.7% over the past 12 months, as of September 13, 2022.
The exceptional performance of these energy-related commodity ETFs can be attributed to various factors. These include the surge in oil, natural gas, and gasoline prices due to increased demand following the economic reopening post-COVID worldwide. Additionally, the slow supply increase by OPEC+ has influenced the market dynamics.
Let’s delve into the details of the top three ETFs as of September 13, 2022:
1. Invesco Dynamic Energy Exploration & Production ETF (PXE)
PXE is a blended multi-cap fund that tracks the Dynamic Energy Exploration & Production Intellidex Index. This index comprises approximately 30 US companies engaged in the exploration and production of oil, natural gas, and other resources. The stocks are selected based on factors like earnings momentum, price momentum, management actions, and value. The fund’s portfolio includes oil refineries, natural gas gathering and processing companies, as well as natural gas liquids (NGL) producers. The fund maintains a fairly even distribution across large-, mid-, and small-cap stocks. The top three holdings of PXE include ConocoPhillips (COP), Diamondback Energy Inc. (FANG), and Continental Resources Inc. (CLR). All three companies are involved in the exploration and production of oil, gas, and other resources.
2. iShares U.S. Oil & Gas Exploration & Production ETF (IEO)
IEO tracks the Dow Jones U.S. Select Oil Exploration & Production Index, which includes US equities within the oil and gas exploration and production sector. This market-cap-weighted ETF provides exposure to companies engaged in exploration, production, and distribution. The portfolio allocation is primarily focused on exploration and production companies, accounting for nearly 75% of the holdings, followed by companies involved in refining, marketing, and transportation. Similar to PXE, IEO adopts a blended investment strategy, investing in a mix of growth and value stocks across various market capitalizations. The top three holdings of IEO include ConocoPhillips, EOG Resources Inc. (EOG), and Pioneer Natural Resources Co. (PXD), all of which are energy companies involved in the exploration and production of oil, gas, and other resources.
3. First Trust Natural Gas ETF (FCG)
FCG tracks the ISE-Revere Natural Gas Index, composed of companies that generate a significant portion of their revenue from natural gas exploration and production. This ETF provides exposure to the natural gas industry, which serves as a fuel source for residential, industrial, and commercial applications. Over 98% of the portfolio is allocated to energy stocks, with less than 2% allocated to utilities. Like IEO, FCG follows a blended investment strategy, investing in stocks across the market capitalization spectrum and in both the value and growth categories. The top three holdings of FCG include DCP Midstream LP (DCP), a midstream company focused on energy logistics, gathering, processing, and NGL production; Western Midstream Partners LP (WES), a midstream company focused on crude oil and natural gas; and ConocoPhillips.
These top-performing ETFs have capitalized on the favorable market conditions in the energy sector, particularly in oil, natural gas, and related commodities. However, it’s important for investors to conduct thorough research and consider their investment goals and risk tolerance before investing in any specific ETF or sector.
