The Vanguard Energy ETF (NYSEARCA:VDE) is given a four star rating from investment research company Morningstar. The ETF gives investors exposure to mega-cap energy giants such as Exxon Mobile (NYSE:XOM) and Chevron (NYSE:CVX), at a rock bottom price.
"Over the years, the diversification benefits seem to have been eroding. Over the past five years, VDE has been 79% correlated with the S&P 500. However, over the past three years its correlation has jumped to 90%. Still, the fund remains an effective tool for investors seeking to overweight the energy sector within a broadly diversified portfolio," John Gabriel wrote for Morningstar.
The exposure to the oil giants through VDE is cost effective for those investors who do not want to choose individual stocks. XOM still makes up around 21% of the portfolio and pays a 2.5% dividend, reports Matt DiLallo for The Motley Fool. Chevron makes up around 13% of the portfolio, followed up by Schlumberger (NYSE:SLB). The aforementioned oil companies are vertically integrated "majors" that operate across the board from refining to distribution, reports Gabriel. This helps to mitigate the exposure and risk to commodity price movements.
Ultimately, VDE is a play on rising global energy demand. The energy sector is capital-intensive and influenced by natural gas and crude oil prices. These factors are led by the supply and demand cycle. In general, fossil fuel prices can rise and fall at the drop of a hat, while the exploration side of the industry can take years to generate a profit. VDE costs 0.14%.
The biggest influences in the global economy to the energy sector now is the continued economic growth in China and worries over the eurozone debt crisis, which has yet to be solved.
Other energy ETFs:
Vanguard Energy ETF
Tisha Guerrero contributed to this article.