America's war with Iran has sent a jolt throughout the oil industry and turned energy-sector exchange-traded funds (ETFs) into some of the hottest commodities on the publicly traded markets.
The U.S. and Israel began launching airstrikes in Iran in late February. In the month or so that followed, West Texas Intermediate crude oil futures, which started the year around $58 per barrel, rocketed to more than double that amount. Prices have been acting in a roller-coaster fashion ever since as the market guesses whether the U.S. and Iran will strike some sort of peace deal, but today, WTI remains elevated at $105 per barrel ... with no one really sure what the ceiling will be.
The result has been pain at the gas pump, but rewards for those who own stock in Big Oil companies like Exxon Mobil (XOM) and Chevron (CVX), as well as other oil producers. And if you want to grab some of those profits for yourself, energy ETFs are among the easiest ways to do that—and a whole lot more.
Let's look at three energy ETFs with a few different investment flavors.
The Best Energy ETFs to Buy
What exactly constitutes a great energy-sector fund is going to vary from one person to the next. That's why I'm going to try to cover a wide swath of strategies in what is a fairly modest-sized list.
Under normal circumstances, I would boot up Morningstar Investor and run a quality screen. However, in this case, I already know there are going to be certain exceptions that Morningstar's screener can't account for (through no fault of its own). Specifically: Morningstar doesn't have Medalist ratings for a number of funds in the Commodity category, and it has not yet rated a fund that effectively replaces a longtime ETF standard in a prominent niche.
So this is admittedly a more subjective picks list with only one parameter: I've made sure that the energy ETFs listed here have at least $100 million in assets under management (AUM), reducing the risk that any of the funds here will be closed by their provider. There's no universal AUM threshold that everyone agrees significantly reduces the risk, but $100 million is a decent baseline for funds that have been around a few years.
The following are three of the picks from our fuller list of the best energy ETFs.
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State Street Energy Select Sector SPDR ETF
- Assets under management: $40.9 billion
- Dividend yield: 2.5%
- Expense ratio: 0.08%, or 80¢ annually on a $1,000 investment
What is XLE?
The State Street Energy Select Sector SPDR ETF (XLE) is the largest energy sector ETF by a country mile—it commands well more than three times more assets than the second-largest such fund, the Vanguard Energy ETF (VDE). It’s also been around for more than a quarter of a century, going live in 1998.
This cheap, simple index fund provides extremely basic exposure to energy (primarily oil and gas) for investors who don’t want to go stock-picking in the sector.
What does XLE hold?
The XLE holds all of the energy-sector stocks in the S&P 500, which at the moment is 21. But not all energy companies are in the same kind of business.
Top holdings Exxon and Chevron are called “integrated” companies, meaning they span upstream (exploration and production), midstream (transportation and storage), and downstream (refining, distributing, and retail). Some holdings are only engaged in one or two “streams”—Phillips 66 (PSX), for instance, doesn’t engage in extracting oil or gas, but it does refine, transport, store, and sell energy products. (Have you seen a Phillips 66 gas station? That’s part of their retail unit.)
What else should you know about XLE?
Here’s a term every beginner investor should know: “cap-weighted.”
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Cap-weighted is short for “market capitalization-weighted,” which means that the bigger the stock, the more assets a fund dedicates to that stock. Exxon, at $655 billion in market capitalization, is the largest stock XLE holds—and it also enjoys the largest “weight,” at 22% of XLE’s assets. By comparison, $14 billion APA Corp. (APA) accounts for a mere 0.7%.
Why does that matter? The more of a fund’s assets a stock commands, the more effect its performance has on the fund’s performance. Effectively, Exxon accounts for 22% of XLE’s performance. Chevron, by the way, accounts for another 16%, so that means just two stocks—XOM and CVX—are responsible for nearly 40% of XLE’s returns! This is called “concentration risk,” and it’s something you need to think about whenever you own a fund—if you already own Exxon and Chevron, buying this SPDR energy ETF puts even more weight on those two stocks’ shoulders.
APA, in the meantime, represents less than 1%. So even a very big move from APA might not be noticeable in XLE’s performance.
That doesn’t necessarily mean State Street Energy Select Sector SPDR ETF is bad. XLE is different from many other funds in that most of its holdings are extremely sensitive to one factor: changes in commodity prices. That means if XOM moves, chances are that ConocoPhillips (COP), EOG Resources (EOG), and all of XLE’s other holdings are moving in a similar direction. Even if the fund’s assets were more evenly distributed, it might not make all that much of a difference. So despite XLE being extremely imbalanced, it remains an effective way to get exposure to the energy sector.
One last note: Dividends from the energy sector are much higher than the market as a whole. XLE often yields more than 3%, but that's "down" to the mid-2% area because of energy's rapid gains over the past few months. And that's still better than double the 1.1% offered up by the S&P 500.
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iShares U.S. Oil Equipment & Services ETF
- Assets under management: $647.3 million
- Dividend yield: 1.1%
- Expense ratio: 0.38%, or $3.80 annually on a $1,000 investment
What is IEZ?
The iShares U.S. Oil Equipment & Services ETF (IEZ) is a more focused energy fund than the aforementioned XLE. Whereas the XLE is a sector-level fund that provides exposure to a variety of different energy industries, the IEZ is a "subsector"-level index fund owning equipment and services firms, with an additional bent toward oil.
This exposure is a higher-risk, higher-reward play on the price of oil than a broad-sector fund.
What does IEZ hold?
The IEZ tracks the Dow Jones U.S. Select Oil Equipment & Services Index, which is made up of stocks within the Dow Jones U.S. Broad Stock Market Index that are classified in the DJICS Oil Equipment & Services subsector. iShares breaks down that subsector into two categories: oil and gas equipment and services (~85% of assets), and oil and gas drilling (~15%).
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Broadly speaking, these companies provide machinery, technology, and labor that other energy firms need to explore for, drill for, and produce crude oil and natural gas. Their offerings include drilling, directional services, seismic testing, and well maintenance, among other things.
The resulting portfolio includes 31 components, including the likes of services giants SLB (SLB) and Baker Hughes (BKR).
What else should you know about IEZ?
Oil and equipment services are a relatively small slice of the energy sector, representing only about 10% to 15% of the assets in most broader energy-sector funds. In XLE, for instance, SLB, Baker Hughes, and Halliburton (HAL) are the only three services firms, accounting for roughly 5%, 4%, and 2% of assets, respectively.
But in the iShares U.S. Oil Equipment & Services ETF, they're the top three holdings, collectively accounting for almost half of the fund's assets as I write this. And the lion's share of that is split between SLB and Baker Hughes at roughly 22% apiece. Thus, much like XLE investors need to worry about Exxon and Chevron, IEZ shareholders have to sweat how SLB and BKR perform.
So, why should we consider owning IEZ?
The upstream E&P businesses prevalent in XLE are perhaps the most directly tied to commodity prices. Oil services' tether to prices is more secondary—they benefit when E&P companies increase their capital expenditures, which is likelier to happen during extended periods of higher commodity prices. In short, they're distinct enough to behave differently and occasionally produce their own pockets of value, even during times when other energy stocks might have become too frothy.
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Invesco DB Oil Fund
- Assets under management: $305.11 million
- Dividend yield: 1.9%
- Expense ratio: 0.73%*, or $7.30 annually on a $1,000 investment
What is DBO?
The Invesco DB Oil Fund (DBO) is a commodity fund that allows investors to track the price of West Texas Intermediate (WTI) light, sweet crude oil via futures contracts.
What does DBO hold?
This Invesco fund tracks the DBIQ Optimum Yield Crude Oil Index Excess Return index, which will generally hold a single month's WTI oil contract. For instance, right now, it holds NYMEX Light Sweet Crude Oil Futures expiring in September 2026.
It also will hold Treasury securities (usually through a fund), as well as money market funds, which will produce income that the ETF distributes on an annual basis.
Related: The 10 Best Fidelity ETFs You Can Buy [Invest Tactically]
What else should you know about DBO?
In each of the previous funds, you're generally trying to reap the benefits of rising oil, gas, and other energy commodity prices by owning equities tied to those commodities. DBO is more direct—performance is tied to oil futures contracts with no corporate middleman.
That said, futures are hardly perfect. While spot prices factor heavily into futures prices, they're not the only variable—they also consider "cost of carry" (storage, insurance, financing), which among other things means that interest rates are also involved.
One big risk you have to consider in futures funds is contango, when futures prices are higher than the current spot price. In the case of some commodity funds, they'll hold only the front-month futures contract, then sell that right before it expires to purchase the next month's futures contract. And there's a risk that the fund will sell that front-month contract for less than what it will pay to purchase the next month's contract.
DBO is built to defray this risk somewhat. Rather than automatically roll over its expiring contracts into next-month contracts, it can roll its contracts over into any futures contract within the next 13 months. This allows DBO to benefit from another futures condition, "backwardation," in which you sell more expensive expiring contracts to purchase less expensive futures (basically the opposite of contango).
* 0.81% gross expense ratio is reduced with an 8-basis-point fee waiver until at least Aug. 31, 2026.
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Disclaimer: This article does not constitute individualized investment advice. Individual securities, funds, and/or other investments appear for your consideration and not as personalized investment recommendations. Act at your own discretion.
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