Broadly-diversified energy ETFs are often the best option for investors seeking more variation in their retirement portfolios, but since a large amount of funds have been allocated to them in recent months, choosing the right ones can affect returns.
While some ETFs invest directly into an underlying commodity such as crude oil or solar, others purchase equities in the energy sector, said David Twibell, president of Custom Portfolio Group, an Englewood, Colo.-based financial planning firm.
"There are so many energy-related ETFs available that it's hard for many investors to choose the right option," he said. "Some focus on niche areas like natural gas or even nuclear energy. There are even some that use leverage to boost returns when oil prices are rising."
Even ETFs that hold a broad-based portfolio of energy stocks can vary widely because many are weighted based on market capitalization and the larger companies will consist of a major share of the fund, Twibell said. The Energy Select Sector SPDR (XLE) , the largest energy ETF with over $15 billion in assets follows the market cap strategy and Exxon Mobil (XOM) accounts for 17.5% of its total value and Chevron (CVX) makes up another 14% of the fund.
"That's nearly a third of the fund's value tied up in two stocks," he said. "No matter what happens with oil prices, if either of these stocks falter, XLE owners will be in trouble."
Instead, another option with less risk involved is to seek an ETF which invests an equal amount in a variety of stocks such as the Guggenheim S&P 500 Equal Weight Energy ETF (RYE) . This fund invests about 3% of its holdings in 36 different energy stocks, Twibell said.