Energy ETFs can be a great investment if you are looking for exposure to the energy sector, if you need to hedge energy investment risk, diversify your portfolio, or if you’re just looking to control inflation exposure as a part of your investment strategy.
However, before you reap the benefits of ETFs that track energy commodities, you should realize that there are different types of energy ETFs.
1. Single-Contract Energy ETFs
Most energy ETFs consist of futures contracts in order to accomplish the goal of tracking energy commodities. In the case of single-contract energy ETFs, the futures contracts are related to one particular energy source.
Fore example, OIL, the iPath S&P GSCI Crude Oil Total Return Index ETN is made up of futures contracts in oil. Even though this particular oil ETN tracks the price of the Goldman Sachs Crude Oil Return Index, it is made up of derivatives contracts in order to accomplish this investment goal. All the futures in this ETF are related to the performance of oil and the underlying index.
2. Multi-Contract Energy ETFs
As opposed to single-contract ETFs, multi-contract ETFs consist of futures that track more than one particular commodity. This type of energy ETF is a more broad fund that isn’t limited to one single form of energy.
For example, DBE, the PowerShares DB Energy ETF consists of futures contracts that are linked to many different types of energy sources. Crude oil, heating oil, natural gas, and gasoline to name a few. The futures in this ETF are not limited to just one commodity such as coal.
3. Bearish Energy ETFs
Similar to inverse ETFs, bearish energy ETFs usually go hand-in-hand with a bullish ETF. However, the two energy ETFs are separated to track different investment goals. Bearish energy ETFs allow you to buy an ETF, yet put on a short position like you are actually selling an ETF.
For example, DOY, the MacroShares $100 Oil Down ETF is a bearish ETF that inversely tracks the spot price of West Texas Intermediate light, sweet crude oil (WTI). If you buy this energy ETF, you want the index price to fall to create profits. The opposite ETF is UOY, the MacroShares $100 Oil Up ETF.
4. Clean and Alternative Energy ETFs
A sub-set of broad-based energy ETFs, broad-based clean and alternative energy ETFs don't focus on every type of energy ETF like gasoline or oil, however they do focus on more than one energy commodity. The types of energy emulated in this ETF are either a form of clean energy or an alternative energy source. Wind and solar power are two good examples of clean and alternative energy sources.
GEX, the Market Vectors Global Alternative Energy ETF and PZD, the PowerShares CleanTech Portfolio ETF are two examples of energy ETFs than fall into this category.
5. Natural Gas ETF
While this type of energy ETF has been under scrutiny, it can't be ignored. UNG, the United States Natural Gas ETF is a prime example of an energy ETF that tracks the price of natural gas. However, the accuracy of the fund has been...controversial in the past, but hopefully resolved.
There are other natural gas ETFs in the investing world as well. If you are interested, FCG, the First Trust ISE-Revere Natural Gas ETF and GAZ, the iPath DJ AIG Natural Gas TR Sub-Index ETN are two investments to consider.
6. Broad Energy ETFs
While the above three types of energy ETFs are more related to the construction of a fund, there are many types of energy ETFs that fall into different categories of the energy sector. And there are some energy ETFs that track the energy sector as a whole.
Broad energy ETFs are multi-contract fundss designed to track the energy industry and give investors exposure to various types of energy like oil, solar, and wind in one investment. These ETFs don't focus on one type of energy, they are more for looking at the broad energy market.
An active broad energy ETF example is the iShares S&P North American Natural Resource ETF (IGE). This ETF may be a good fit for a portfolio looking to diversify with some overall exposure to the energy market.
7. Gasoline ETFs
There's natural gas ETFs and then there's gasoline ETFs. Two different investments and not to meant to be interchangeable. If you are looking for an energy investment a little closer to automotive fuels, but aren't looking for an oil ETF, then a gasoline ETF like UGA, the United States Gasoline ETF may be an investment to consider.
8. Wind Energy ETFs
Let a wind ETF blow back your portfolio. If you want your investment strategy to "go green", then an alternative energy fund like a wind ETF may be the way to go. The concept of clean energy is getting more popular by the day, so a wind ETF might be an up-and-coming investment to consider - a wind ETF like the First Trust Global Wind Energy ETF (FAN) or PWND, the PowerShares Global Wind Energy ETF.
9. Solar Energy ETFs
Solar energy is more popular now than ever and so are solar energy ETFs. People have solar water heaters, pool heaters, energy-efficient windows, solar-powered homes...and now there is even a solar-energy government incentive in the works where power companies may pay you for your excess solar energy. Not to mention he current tax rebates for energy efficient home improvements.
So if you want to capitalize on the solar energy movement, maybe you should research a solar energy ETF like the Market Vectors Solar Energy ETF (KWT) or the Claymore Mac Global Solar Energy ETF (TAN).
10. Nuclear Energy ETFs
People are on both sides of the fence when it comes to nuclear energy. But whether you are bullish or bearish just depends on how you play a nuclear energy ETF. Think nuclear energy will always be needed, buy a nuclear ETF like NLR, the Market Vectors Nuclear Energy ETF. Or if you think alternative energy sources will make nuclear energy obsolete, sell a nuclear energy ETF like NUCL, iShares S&P Global Nuclear Energy Index ETF.
However, please make sure you conduct thorough research before you make any ETF investments.
