Exchange-traded funds are all the rage these days. With the all-day tradability of a stock, the diversification benefits of a mutual fund, and, in most cases, really low expenses, ETFs can be a great tool for investors.
Energy investors have a number of ETF options for their portfolios. Today we’ll look at Vanguard Energy ETF (NYSEARCA:VDE), which Morningstar, Inc. (NASDAQ:MORN) gives a four-star rating. The fund has a low expense ratio of 0.14%, with nearly all of its holdings dedicated to oil, exploration, production, refining, or transportation. Of the 169 companies the ETF holds, the top 10 make up nearly 60% of its total assets.
The fund’s top holding is Exxon Mobil Corporation (NYSE:XOM), at a whopping 21.6% of net assets. That’s not necessarily a bad thing, as Exxon is one of the world’s largest publicly traded companies, with a market cap of nearly $400 billion. The oil giant trades for a reasonable 10 times earnings and pays a fairly decent 2.5% dividend. With integrated operations around the world, Exxon is an energy ETF in its own right. That’s why if Exxon is already part of your portfolio, you might want to think twice before adding Vanguard Energy so that you’re not overallocated to the global giant.
The fund’s second largest holding is Chevron Corporation (NYSE:CVX) at 13.5%. After that, the allocations drop off dramatically, with Schlumberger Limited. (NYSE:SLB) coming in next at 5.8%. For those keeping score, that’s 40% of the fund’s assets in just three companies. Schlumberger does add some diversification to the mix, though, as the oilfield services giant isn’t as exposed to the operational risks or commodity price fluctuations that come with being an oil major. Instead, Schlumberger, with operations in 85 counties, profits as a “pick-and-shovel” play.
Rounding out the top four is ConocoPhillips (NYSE:COP), which at one time was a major integrated oil company. It has since spun off its refining, midstream, and chemical operations into Phillips 66 (NYSE:PSX), which also finds its way into the top 10 as the fund’s ninth largest holding. Conoco makes up 4.4% of the fund’s assets and is the first of five independents cracking the top 10, while Phillips 66 accounts for just 2% of the fund’s net assets and is the lone refiner to make the top 10. Conoco adds one of the largest dividends to the fold, as its 4.5% yield is more than twice the 1.8% that the fund itself yields. Meanwhile, Phillips 66 adds a growing dividend, with exposure to midstream, chemicals, and, of course, refining.