Energy ETF: What It Is and How To Invest

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James Chen
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James Chen, CMT is an expert trader, investment adviser, and global market strategist.

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Updated November 30, 2023
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Cierra Murry
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Energy ETFs

Investopedia / Jessica Olah

What Is an Energy ETF?

An energy ETF is an exchange-traded fund that exposes investors to the energy sector. Energy ETFs track a broad sector index, sub-sector, commodity, or other assets by investing in oil, gas, and alternative energy companies.

Energy ETFs allow investors to diversify their risk by giving them access to a broad range of investments without choosing individual companies. Like stocks, energy ETF shares can be purchased on an exchange.

Key Takeaways

  • An energy ETF is an exchange-traded fund that exposes investors to the energy sector.
  • They track a broad sector index, sub-sector, commodity, or asset.
  • Energy ETFs invest in oil, gas, and alternative energy companies.
  • Energy ETFs allow investors to diversify their portfolios and reduce risk.

Understanding Energy ETFs

Exchange-traded funds were introduced in the 1990s and offer individuals an opportunity to diversify their portfolios. Like mutual funds, ETFs expose investors to a basket of securities that track an underlying index, commodity, sub-sector, or asset. ETFs trade on exchanges, which means shares are available for purchase through a brokerage account. Like mutual funds, they can be actively and passively managed.

The energy sector represents a significant part of the global economy and is evident in the broad market averages like the S&P 500. Energy ETFs are baskets of securities of oil, gas, and alternative energy companies, including those involved in the exploration, production, distribution, transportation, and manufacturing of energy and related products.

Specialized energy ETFs cover a wide range of business types, regions, and risk profiles. There are choices for both conservative and aggressive investors. The sector encompasses a highly complex and sophisticated network of companies involved in the production and distribution of the energy needed to power everyday life and routine business.

1990

The year the world's first ETF, Toronto 35 Index Participation Units, was launched, which traded on the Toronto Stock Exchange (TSX). The first ETF was introduced in the United States in 1993.

Investing in Energy ETFs

By choosing ETFs, investors can diversify their portfolios and reduce risks associated with investing in the energy sector, such as market risk, commodity price risk, and geopolitical risk. ETFs offer the option to choose clean energy ETFs while avoiding traditional energy companies that deal with oil, gas, and coal. Investors commonly use a brokerage account to begin trading.

As of November 2023, 55 energy ETFs traded on the U.S. markets with a total of $82.2 billion in assets under management (AUM), according to ETF.com. The average expense ratio for these ETFs was 0.67%.

The Energy Select Sector SPDR Fund (XLE) is the largest energy ETF and is managed by State Street Global Advisors. As of November 2023, the ETF had $37.7 billion in AUM and a gross expense ratio of 0.10%. Its goal is to provide investors with an "effective representation of the energy sector of the S&P 500 Index." Other popular energy ETFs available on the market as of October 2023 include:

ETF Name Ticker Symbol Assets Under Management Expense Ratio Benchmark Index
iShares Global Energy ETF IXC $3 billion 0.44% S&P Global 1200 Energy Sector Index
Vanguard Energy ETF  VDE $9.8 billion 0.10% Spliced US IMI Energy 25/50
Fidelity MSCI Energy ETF FENY $1.6 billion 0.084% MSCI US IMI Energy 25/50
Global X MSCI China Energy ETF CHIE $5.4 million 0.66% MSCI China Energy IMI Plus 10/50 Index
Invesco Solar ETF TAN $2.4 billion 0.69% MAC Global Solar Energy Index

What Are the Risks of Investing in ETFs?

ETFs provide diversification but there are risks to consider. Any specialized sector-based ETF like ones that track energy stocks can add volatility to a portfolio, so it's important to do your research before you make any investment decisions. Reviewing the prospectus is a prudent move for any investor, especially when considering volatile commodities like energy.

Do ETFs Pay Dividends?

Dividends are treated in two ways by ETFs. Some reinvest the dividends paid out by companies in their portfolios back into the funds. Others pay them out directly to shareholders. In this case, payouts are considered dividends from the ETF—not the companies that issue them. As such, they're disbursed from the fund's total assets.

What Are Renewable Energy ETFs?

Companies that produce energy from solar, wind, and other renewable sources are considered renewable energy companies. ETFs such as the iShares Global Clean Energy ETF (ICLN) invest in these companies.

The Bottom Line

An energy ETF is an exchange-traded fund that exposes investors to the energy sector. ETFs track a broad sector index, sub-sector, commodity, or asset. Investors who choose energy ETFs are exposed to oil, gas, renewable, and alternative energy companies.

Article Sources
Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.

  1. Canadian ETF Association. “Guide to the Canadian ETF Industry - A Road Map.” Pages 4-5.

  2. Vanguard. "History of ETFs."

  3. ETF.com. "Energy ETFs: Overview."

  4. State Street Global Advisors. "The Energy Select Sector SPDR Fund."

  5. iShares. “iShares Global Energy ETF (IXC).”

  6. Vanguard. “Vanguard Energy ETF (VDE).”

  7. Fidelity. “Fidelity MSCI Energy ETF (FENY).”

  8. Global X. “Global X MSCI China Energy ETF (CHIE).”

  9. Invesco. “Invesco Semi-Annual Report to Shareholders.” Page 9.

  10. Invesco. “Invesco Solar ETF (TAN).”

  11. iShares. "iShares Global Clean Energy ETF."

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Part of the Series
Commodity ETF Guide
Metals and Mining
  1. Commodity ETF: Meaning, Overview, and Guide
  2. Precious Metals ETFs: What They Are and How They Work
  3. What ETFs Track the Metals and Mining Sector?
  4. Silver ETF: Meaning, Tax Implications, Examples
  5. Platinum ETFs: What They Are and How They Work
  6. Gold and Gold Mining ETFs: What They Are and How They Work
  7. Double Gold ETF: Meaning, Risks, Example
  8. Short Gold ETF: Meaning, Pros and Cons, Examples
  9. Gold ETFs vs. Gold Futures: What’s the Difference?
  10. Copper ETFs: What They Are and How They Work
Energy
  1. Most Common Oil and Gas ETFs
  2. Energy ETF: What It Is and How To Invest
    CURRENT ARTICLE
  3. Oil ETF: What It is, How it Works, and Challenges
  4. What Are Natural Gas ETFs, and How Do they Work?
  5. Investing in Commodity ETFs
  6. Water ETFs: What They Are and How They Work
Agriculture
  1. Agricultural ETFs: What You Need to Know
  2. Corn vs. Soy vs. Wheat: What Investors Need to Know