NEW YORK (TheStreet) -- Explosive growth in emerging markets, as well as a trend toward efficient energy technology and "green" energy use, makes the energy sector a compelling area to allocate assets both in the short and long terms.
Equity-based energy ETFs offer exposure to everything from large, integrated firms like Exxon Mobil (XOM) to clean energy pioneers like Cree (CREE), while avoiding the regulatory hassles of funds that use futures and swaps to access the sector.
These five energy ETF picks are well constructed, liquid funds that are worth considering when building a well-diversified portfolio.
- iShares S&P North American Natural Resources Sector Index Fund (IGE). IGE tracks U.S-traded, natural resource-related, firms in both the energy and materials sectors.
While much of this portfolio is focused on large energy firms like XOM, Chevron (CVX) and ConocoPhillips (COP), IGE's underlying basket also includes miners like Barrick Gold (ABX) and construction materials producer Vulcan (VMC).This highly-traded, reasonably priced ETF is a good addition for investors looking to gain exposure to U.S.-traded energy firms, while avoiding overconcentration in the oil/gas subsector.
- First Trust ISE-Revere Natural Gas (FCG) While the success of the companies that comprise FCG is certainly tied to cyclical natural gas prices , the demand for the extraction and production of this energy source make this ETF a promising play over time. Top components like Pioneer Natural Resources (PXD) and XTO Energy (XTO), which have helped to propel FCG in 2009, still look like solid plays in 2010. FCG is certainly focused, but this fund's low concentration of assets in its top holdings helps to minimize security-specific risk.
- PowerShares WilderHill Clean Energy (PBW). Scientists may disagree on global warming, but investors can be relatively certain that both legislation and regulation will favor "green energy" companies in the future. Investors looking to get ahead of the curve should consider PBW, a fund that includes firms like LED-provider CREE and solar power companies across the globe. PBW's well-balanced portfolio and reasonable expense ratio help to make green energy firms accessible to traders.
- PowerShares Dynamic Oil & Gas Services (PXJ). Investors looking to gain exposure to oil and gas through ETFs have a wide variety of choices, but PXJ's indexing strategy sets this fund apart. Rather than just focusing on the largest gas and oil firms, PXJ's portfolio is selected using factors like fundamental growth, stock valuation, investment timeliness and risk factors. While PXJ's components include industry giants like Halliburton (HAL) and Schlumberger (SLB), no single company makes up more than 5.21% of the underlying portfolio. PXJ's diverse large-, mid- and small-cap components help this fund to stand out among its peers.
- iShares S&P Global Energy (IXC). Despite the top-heavy nature of its underlying portfolio, IXC offers inexpensive exposure to a wide range of global energy firms. This large, liquid, ETF tracks the S&P Global Energy Sector Index. Prospective investors should be aware that top component XOM makes up more than 14% of this fund's assets. Other top components in IXC include Royal Dutch (RDSA) and Petroleo Brasileiro (PBR). This fund is a good place to start for investors seeking broad exposure to the global energy market.
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