The energy business is popping, what with the price of crude oil recently surging past $50 a barrel and big oil stocks regularly making new highs.

Those factors have added up to a good year for most investors in the sector. But for those who favor the liquidity and transparency of exchange-traded funds, playing the oil patch hasn't been quite as easy as you might expect.

An ETF is similar to an index fund, but it is traded on a stock exchange and you buy shares through a broker. The most appealing feature of ETFs, many observers agree, is the degree to which they trade like stocks. These funds have grown increasingly popular in recent years, led by big index offerings such as the tech-tracking QQQ fund that mimics the big tech stocks in the

Nasdaq

.

So with oil stocks among the market's top performers this year, a brief glance at the oil-and-gas ETF field produces a surprising result. As of mid-September, there were only four energy ETFs. Another new one was rolled out last week, and of course, more may yet follow.

Still, potential ETF investors better firmly understand the pros and cons before forking over hard-earned cash for any of these funds. They track various indices and, because of the outsize gains in some of their big holdings, tend to be heavily concentrated in a few big-cap names (think

ExxonMobil

(XOM) - Get Report

). Buyers who don't do their due diligence might not be pleased with their results.

There are currently five major energy ETFs available, now that

Vanguard

has introduced its energy VIPER (that's short for Vanguard Index Participation Equity Receipt). The fund, which is listed under the symbol VDE and began trading last week, tracks the MSCI US Investable Market Energy Index.

Prior to the Vanguard release, the only four available ETFs included the

iShares Dow Jones U.S. Energy Sector

(IYE) - Get Report

,

iShares Goldman Sachs Natural Resources

(IGE) - Get Report

,

iShares S&P Global Energy Sector

(IXC) - Get Report

and the

Energy Select Sector SPDR

(XLE) - Get Report

.

Merrill Lynch also offers the

Oil Service HOLDRs Trust

(OIH) - Get Report

, which includes names like

Baker Hughes

(BHI)

and

Halliburton

(HAL) - Get Report

at 11.2% and 9% of the portfolio respectively.

Interested investors should take note, however, that while HOLDRs, short for "holding company depositary receipts," have many of the same characteristics as ETFs, such as transparency and liquidity, there are important structural differences. HOLDRs don't track a specific index like traditional ETFs. And once the HOLDR starts trading, the baskets are not rebalanced on a quarterly or biannual basis like other index ETFs. That means the proportions of stocks within the HOLDRs can change drastically, at times leaving an issue heavily concentrated in just a few names.

A good example of the differences between the traditional energy ETFs can be found comparing the components of the iShares offerings.

The Dow Jones U.S. Energy Sector ETF holds only domestic companies, as reflected by the comparatively heavy weightings of ExxonMobil and

ChevronTexaco

(CVX) - Get Report

at 23.27% and 22.32% of the portfolio respectively. (All the indexes are market-cap weighted, which explains the immense pull in these funds of ExxonMobil, which wields a market cap of $313 billion.)

The S&P Global Energy Sector ETF also puts ExxonMobil atop the list at 19.62% of assets, but the ETF's next three largest holdings are foreign companies:

British Petroleum

(BP) - Get Report

, 13.02%; French oil producer

Total SA

(TOT) - Get Report

, 8.16%; and

Royal Dutch Petroleum

(RD)

, 6.22%.

The differences between the indices are even more acute when you compare these funds to the iShares Goldman Natural Resources ETF. All the major oil producers like ExxonMobil can be found in this ETF because it has 61.3% of its assets in oil stocks. Nevertheless, it also holds 14.89% in oil services stocks, 12.63% in metals and mining stocks like

Alcoa

(AA) - Get Report

and 7.35% in paper and forestry companies like

International Paper

(IP) - Get Report

. Not exactly a pure play on energy stocks by any means.

Investors looking for an unadulterated energy ETF might also try the Energy Select SPDR, which consists of the 23 energy stocks in the

S&P 500

. This ETF puts close to 80% in oil and gas stocks and 20% in oil services stocks. And in case you were wondering, 21% of this portfolio is in ExxonMobil.

Aside from the differences in the indices, there are also some fees. The three iShares offerings charge 60 basis points, which is generally around a third of the cost of the average sector mutual fund. The VIPER and SPDR are even cheaper at 28 basis points.

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