If someone (friend, family member, stranger, etc.) asked for your advice on whether or not they should be investing in Oil & Gas, what would you tell them?

Like me, you would probably have to give this question quite a bit of thought. What are current crude prices and how do I expect them to change, what global macroeconomic or political changes could I possibly predict, and even what unforeseen calamities may happen in the future that affect commodity prices. There is a myriad of different combinations of events that could transpire that would affect Oil & Gas investments in any number of ways. For the average investor, understanding the nuances of investing in oil and gas is difficult without having a thorough understanding and experience in the industry itself.

The easiest way to evaluate the overall investment performance of the Oil & Gas industry is by looking at sector-specific Exchange Traded Funds (ETFs.) While there are many people out there that claim to be better at picking stocks or timing the market than the rest of us, I think ETFs provide a good look at the performance of the industry as a whole.

Just to be clear, we are going to be looking at the performance of ETFs that invest in a portfolio of oil company stocks. This is different than ETFs that track the price of oil as a commodity. For this discussion we will be looking at the largest 4 ETFs as determined by Assets Under Management (AUM.) These ETFs all broadly belong to the Equity Energy Fund Category. More specifically, these ETFs are comprised primarily of the following Sub-Industry Allocations: Oil & Gas Exploration & Production, Oil & Gas Refining & Marketing, and Integrated Oil & Gas. With the exception of the iShares Global Energy ETF (IXC), the rest of these funds only have geographic exposure to U.S. equities.

Plotting the Total Return vs Time of these ETFs is produced in the graph below. The energy sector ETFs all follow the same general trends and performance characteristics, which is in large part due to the fluctuations in underlying commodity prices and the same dominant positions these funds hold in just a handful of companies. The charts at the bottom of this page illustrate Top 10 Holdings in each ETF by % weight of total holdings..

Keep in mind the Y-axis is “Total Return,” which is why the older the ETF, the better the growth. Simply put, these ETFs have had more time for the factors listed in the definition below to accumulate.

I have chosen to look at Total Return because I believe it is an easily understood metric that fully considers many of the relevant investment decision making factors that were listed above.

Now that we have analyzed the leading Equity Energy ETFs, let’s compare them to ETFs in other sectors. These ETFs were chosen to give a wide sampling of available options, such as by inception date and issuer. I have normalized the data back to the oldest ETFs’ inception date, Dec 1998.

This graph shows that despite all of the turbulence and unpredictability of the Oil and Gas Industry, investments within it have shown to be worthwhile and lucrative in the past. The leading Energy ETF, XLE, showed incredible gains and profound losses in performance over the past 22 years. While the previous 6 years haven’t been the best for Oil & Gas investments, the prior 16 years outperformed many other sectors. When the Oil & Gas Industry stages it’s eventual comeback the discussion around the water cooler will be why we did not buy more when “prices were cheap.”

The next time someone walks up to you and asks for your honest opinion on whether they should invest a portion of their hard-earned money into the Oil & Gas sector, what will you tell them?

Energy ETF Holdings

Notice: