Energy ETFs: How to Play the Sector's Surge

Energy is the best-performing sector this year, up about 53%, significantly ahead of the second-best performer, information technology, which has gained about 28%. Oil prices have almost doubled from their late-2025 lows and remain elevated amid persistent supply risks, with the war showing no signs of resolution anytime soon.

Investors have two ways to gain exposure to energy. They can invest in energy commodity ETFs, such as the United States Oil Fund (USO), which hold oil futures, or energy equity ETFs, which invest in energy companies.

Commodity ETFs that use futures are generally more suitable for short-term trading because of rollover costs, while energy equity ETFs are more appropriate for long-term investors.

However, this year, ETFs like USO and the United States Brent Oil Fund (BNO) have significantly outperformed the prices of the crude oil benchmarks they are designed to track, thanks mainly to backwardation. Oil Surges, Tanker Rates Soar: ETFs in Play

Energy companies have also become much more disciplined, focusing on maximizing shareholder value rather than increasing oil production. The energy sector is expected to post earnings growth of 122.2% in Q3 compared with the same period last year, per Zacks Earnings Trends. Many energy giants are also offering attractive dividends thanks to rising cash flows, making them appealing to income-seeking investors.

Additionally, most investors have very little exposure to the energy sector through broad-market ETFs, such as S&P 500 ETFs. The energy sector accounts for just 3.7% of the broad-market index, compared with more than 38% for information technology. Energy ETFs can therefore provide diversification benefits to portfolios heavily exposed to the AI trade.

How to Choose the Right Energy ETF

However, energy is not a monolithic sector. Energy ETFs have delivered widely varying returns depending on where they invest along the oil value chain.

Refiners, which profit from the spread between crude oil prices and the prices of refined products, have been among the top performers. The war in the Middle East has damaged several refineries in the region, while continued Ukrainian drone strikes have crippled refineries in Russia.

Although President Trump recently signed a deal with Russia to export millions of tons of diesel, experts remain skeptical about whether the move will make a difference. The VanEck Oil Refiners ETF (CRAK) has surged more than 75% year to date.

The State Street Energy Select Sector SPDR ETF (XLE) provides exposure to the entire energy sector of the S&P 500 but is heavily concentrated in its two largest holdings, Exxon (XOM) and Chevron (CVX), which together account for more than 40% of the portfolio.

ETFs like the iShares U.S. Oil & Gas Exploration & Production ETF (IEO), offer diversified exposure to U.S. companies engaged in oil and gas exploration and production.

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This article originally published on Zacks Investment Research (zacks.com).

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