Extended production cuts by oil-producing countries and the expected rise in oil demand brighten the energy industry’s long-term prospects. Given this backdrop, it could be wise to boost one’s portfolio by adding energy ETFs Vanguard Energy Index Fund (VDE), Energy Select Sector SPDR Fund (XLE), and SPDR S&P Oil & Gas Exploration & Production ETF (XOP).
Oil and gas prices soared last year over fears of supply constraints arising out of the ban on the supply of Russia’s oil and gas following its invasion of Ukraine. However, oil prices retreated toward the end of last year as supplies normalized. Oil prices started rising again and crossed $90 a barrel for the first time since November 2022.
However, oil prices have fallen since then despite the production cuts announced by OPEC+ nations and Russia and the ongoing conflict between Israel and the militant group Hamas.
Oil prices have also declined as China’s recovery does not look promising, as it saw a decline in its recently published manufacturing activity data. Also, the recent EIA data showed that stockpiles rose more than expected. Moreover, the supply fears arising out of the conflict in the Middle East are easing.
However, crude oil prices are expected to rise as top oil exporter Saudi Arabia is likely to reconfirm the extension of its voluntary oil-output cut of 1 million barrels per day through December. Moreover, OPEC has stuck to its world oil demand forecast for 2023 and 2024. It projected solid global economic growth and continued improvements in China to drive oil consumption in 2024.
OPEC believes world oil demand will rise by 2.25 million barrels per day (bpd) in 2024 and grow to 2.44 million bpd this year. Furthermore, U.S. natural gas production and demand are expected to rise to record highs this year. In its Short Term Energy Outlook, the Energy Information Administration (EIA) said projected dry gas production will increase to 103.72 billion cubic feet per day (bcfd) in 2023 and 105.13 bcfd in 2024.
It has also projected that domestic gas consumption would rise from a record 88.46 bcfd in 2022 to 89.17 bcfd in 2023. Global electricity demand is forecasted to grow between 62% and 185% by 2050 when compared to 2021 levels. The EIA estimates that U.S. power generation from renewables will rise from 21% in 2021 to 44% in 2050. However, oil is expected to remain the largest energy source, just ahead of renewables.
JP Morgan believes world oil demand will reach 106.9 mbd by 2030, a 5.5 mbd rise from 2023 levels. It believes oil prices could spike to $150/bbl in the near to medium term and $100/bbl over the long term.
Considering these conducive industry trends, let’s evaluate the three Energy Equities ETFs picks, starting with number 3.
ETF #3: Vanguard Energy Index Fund (VDE)
VDE is managed by The Vanguard Group, Inc. It invests in stocks of companies operating across energy sectors. The fund invests in growth and value stocks of companies across diversified market capitalization. The fund seeks to track the performance of the MSCI US Investable Market Index (IMI)/Energy 25/50.
With $10.60 billion in assets under management, VDE’s top holding as of September 30, 2023, is Exxon Mobil Corporation (XOM), with a 23.40% weighting, followed by Chevron Corporation (CVX), with a 15.06% weighting, and ConocoPhillips (COP), with 7.14%. It has a total of 110 holdings.
VDE has an expense ratio of 0.10%, lower than the category average of 0.45%. It currently has a NAV of $123.33.
The fund’s annual dividend of $4.22 yields 3.42% on the current share price. Its four-year average yield is 4.08%. Its dividend payouts have increased at a CAGR of 8.6% over the past three years and 7.5% over the past five years.
VDE has gained 11.4% over the past six months and 1.7% year-to-date to close the last trading session at $123.30.
VDE’s POWR Ratings reflect this promising outlook. The ETF’s overall B rating equates to Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.
VDE has an A for Buy & Hold and a B for Peer and Trade. Of the 46 ETFs in the B-rated Energy Equities ETFs group, it is ranked #11. Click here to access all of VDE’s POWR Ratings.
ETF #2: Energy Select Sector SPDR Fund (XLE)
XLE was launched by State Street Global Advisors, Inc. and is managed by SSGA Funds Management, Inc. The fund invests in stocks of companies operating across energy sectors. The fund seeks to track the performance of the Energy Select Sector Index.
With $39.02 billion in AUM, the fund has 23 holdings. XLE’s top holding is Exxon Mobil Corporation (XOM), with a 22.44% weighting, followed by Chevron Corporation (CVX), with a 16.93% weighting, and EOG Resources, Inc. (EOG), with 4.79%.
XLE has an expense ratio of 0.10%, lower than the category average of 0.45%. It currently has a NAV of $87.55. Its fund inflows came in at $1.34 billion over the past month.
The fund’s annual dividend of $3.03 yields 3.47% on the current share price. Its four-year average yield is 5.61%. Its dividend payouts have increased at a CAGR of 11.3% over the past three years and 9.2% over the past five years.
XLE has gained 8.8% over the past six months and 0.1% year-to-date to close the last trading session at $87.56.
XLE’s strong outlook is reflected in its POWR Ratings. The ETF has an overall rating of B, translating to a Buy in our proprietary rating system.
It has an A grade for Buy & Hold and a B for Peer and Trade. It is ranked #10 in the same group. To access all the POWR Ratings for XLE, click here.
ETF #1: SPDR S&P Oil & Gas Exploration & Production ETF (XOP)
XOP was launched by State Street Global Advisors, Inc. The fund is managed by SSGA Funds Management, Inc. It invests in stocks of companies operating across energy, oil, gas and consumable fuels, oil and gas exploration and production sectors. The fund seeks to track the performance of the S&P Oil & Gas Exploration & Production Select Industry Index.
With $3.74 billion in AUM, XOP’s top holding is Exxon Mobil Corporation (XOM), with a 4.72% weighting, followed by Range Resources Corporation (RRC), with a 2.90% weighting, and Antero Resources Corporation (AR), with 2.85%. It has a total of 57 holdings.
XOP has an expense ratio of 0.35%, lower than the category average of 0.45%. XOP’s fund inflows were $48.71 million over the past month. It currently has a NAV of $148.76.
The fund’s annual dividend of $3.51 yields 2.36% on the current share price. Its four-year average yield is 2.14%. Its dividend payouts have increased at a CAGR of 33.7% over the past three years and 27.3% over the past five years.
XOP has gained 23.5% over the past six months and 9.4% year-to-date to close the last trading session at $148.71.
XOP’s POWR Ratings are consistent with its promising outlook. The ETF has an overall A rating, which equates to a Strong Buy in our proprietary rating system.
It also has an A grade for Buy & Hold and Trade and a B for Peer. It is ranked first within the Energy Equities ETFs group. Click here to access all of XOP’s ratings.
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XLE shares were trading at $86.72 per share on Friday morning, down $0.84 (-0.96%). Year-to-date, XLE has gained 1.81%, versus a 14.89% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.
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