ETF Specialist

A Low-Cost Way to Make a Diversified Bet on Energy Stocks

Ben Johnson, CFA

 Energy Select Sector SPDR ETF (XLE) offers broad, inexpensive exposure to the energy sector. This exchange-traded fund invests in every energy company in the S&P 500 and weights its holdings by market capitalization. This includes integrated oil and gas producers, firms that engage in oil and gas exploration and production, companies providing oil and gas equipment and services, and those in the refining and marketing segment of the value chain. From a commodity-type standpoint, firms related in some manner to oil and gas comprise more than 80% of the assets of this ETF, with equipment and services firms making up the balance. Because of this ETF's industry concentration, this fund would be most suitable as a satellite holding in a diversified portfolio.

This portfolio is top-heavy. It is dominated by a pair of heavyweights: vertically integrated supermajors  Exxon Mobil (XOM) and  Chevron (CVX), which together make up more than 30% of XLE's assets. While these two firms represent a large chunk of assets, they operate in a diverse set of businesses across the energy complex. Energy-market volatility has had a major impact on United States equity-market performance in recent years. That has made this fund far more volatile than the broader market. For example, over the past 10 years, this ETF's standard deviation of returns of 22.2% is far higher than the 15.3% posted by the S&P 500. And XLE's three-year standard deviation of returns of 19.2% also far eclipses the 10.5% logged by the broad benchmark. Within this fund, some of the greatest volatility can be found in the performance of energy exploration and production firms such as  Schlumberger (SLB),  Baker Hughes BHI, and  Halliburton (HAL). In aggregate, exploration and production firms make up just under one fifth of this ETF's assets.

Ben Johnson, CFA does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.