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Finding the Best Energy ETF for Your Portfolio

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 Plenty of Options in the Hunt for the Best Energy ETF

ETFsInvestors looking for ways to gain exposure to the energy sector are blessed because in the world of ETFs, there are no shortage of contenders for the title of “Best Energy ETF.” Having lots of choices is never a bad thing, but investors must be aware that there is a dizzying array of choices when it comes to energy ETFs. With that, only a few can wear the crown of best energy ETF in their respective market niches.

In their respective hunts for the best energy ETF, investors should start by deciding what their looking: Exposure to energy stocks or exposure to the oil and natural gas futures markets. It should be noted that ETFs such as the US Oil Fund (NYSE: USO) and the US Natural Gas Fund (NYSE: UNG) are not particularly bad ETFs, but their vulnerability to contango ensures they will probably never be considered the best energy ETF.

Best Energy ETF: Careful Where the Holdings Lie

On the surface, the Energy Select Sector SPDR (NYSE: XLE) appears to be a valid candidate for best energy ETF. It features a low expense ratio (just 0.2%), is highly liquid and has a robust assets under management total of more than $6.4 billion. That’s all nice, but investors looking under the hood will find Exxon Mobil (NYSE: XOM) and Chevron (NYSE: CVX), the two largest U.S. oil companies, loom large in this ETF as well. Those two stocks account for over 32% of XLE’s weight, meaning the diversity just isn’t there to say this is the best energy ETF.

The same goes for the Oil Services HOLDRs (AMEX: OIH). OIH looks like it could be crowned best energy ETF, or at least the best oil services ETF, but it’s too heavily concentrated in just a few stocks such as Halliburton (NYSE: HAL), Schlumberger (NYSE: SLB) and Transocean (NYSE: RIG).

Best Energy ETF: The Alternatives

Don’t fret, because there are legitimate alternatives in the hunt for the best energy ETF. For investors looking for broad exposure to oil and gas producers, the SPDR S&P Oil & Gas Exploration & Production ETF (NYSE: XOP) is worthy of best energy ETF consideration. On the oil services front, the best energy ETF may just be iShares Dow Jones U.S. Oil Equipment Index Fund (NYSE: IEZ). The best energy ETF in the small-cap spectrum is the PowerShares S&P SmallCap Energy ETF (Nasdaq: PSCE).

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