How do I Choose the Best Energy ETF?

Choosing the best energy ETF involves looking at the energy sector, as well as identifying what the specific exchange-traded fund consists of, what costs are involved, and how it is likely to perform within the greater market. Exchange traded funds (ETFs) allow for a specific kind of short or long term trading for commodities like energy. Using the best energy ETF options, investors can broaden and diversify their portfolio by including these “derivative” energy plays.

One aspect of choosing the energy ETFs that work for your portfolio is considering the scale of the fund. Some energy ETFs are composed of national or regional energy stocks, where others are global. Some other energy ETFs focus on specific “sublists” within the energy sector. Investors will also want to look at what kinds of stocks are involved in the basket of equities that make up the energy ETF, for instance, how much of the ETF has to do with specific operations such as mining.

Investors can also look at different types of energy ETFs that produce returns in various ways. The standard equally weighted energy ETF has a collection of energy stocks that are poised to grow over time. Other energy ETFs are built a bit differently. For example, leveraged ETFs will produce a return with a multiplier, so that if an energy index or set of stocks rises a certain amount, the payoff will be doubled, tripled, or otherwise multiplied according to the amount of leverage built into the fund.

Those who are interested in getting into a energy ETF will also want to look at cost. Cost for exchange-traded funds and similar instruments is often recorded in the form of an “expense ratio.” Experts point out that expense ratios for specific energy sector ETFs can be significantly higher than those for broader ETF index funds. Each one has its own expense ratio that is critical to calculating net gains.

A different kind of observation for energy ETFs includes looking at the overall context, or how the investor expects the underlying equities of the ETF to perform over time. Some energy ETFs include stocks from emerging markets. Others use different strategies to project bigger gains for those who are involved. Investors must always examine their cost basis and expected tax burden for a fund, as well as any fees and commissions attached. ETFs can also have certain restrictions like a minimum contribution that must be considered before the investment is made.