The volatile oil market in 2022 has stoked an already contentious debate about the medium-term future of the energy sector. On one side, limited crude supplies have led some to argue for an expansion of oil drilling. On the other, climate-conscious investors have called for an accelerated switch to green energy sources.
This argument has carried over into the world of exchange traded funds, where investors have the opportunity to choose which side of the discussion they prefer.
In the past few years, ETF issuers have scrambled to create funds aimed at the ESG market. Broadly speaking, this area covers environment, social and corporate governance standards, although in practice most of the emphasis is on the environment.
However, while ESG may be better for the planet, is it better for your investment portfolio, especially compared to traditional funds focused on Big Oil?
Below is a breakdown of the returns, momentum, dividend payouts and expense ratios for some of the market’s popular oil and gas funds, compared with similar funds with an ESG emphasis.
Traditional Energy ETFs
Four of the largest oil and gas ETFs include the Energy Select Sector SPDR Fund (NYSEARCA:XLE), Vanguard Energy ETF (NYSEARCA:VDE), Alerian MLP ETF (AMLP) and the SPDR S&P Oil & Gas Exploration & Production ETF (XOP).
One-Month Returns: XLE +24%, VDE +21.8%, AMLP +12.3%, and XOP +25.5%.
One-Year Returns: XLE +48.7%, VDE +46.5%, AMLP +9.8%, and XOP +34.5%.
Three-Year Returns: XLE +51.3%, VDE +56.2%, AMLP -6.9%, and XOP +70.4%.
Looking at the momentum and dividends for the funds, Seeking Alpha’s Quant Ratings provide high marks for all four funds. Here is a breakdown:
Looking at costs, XLE and VDE have skimpy expense ratios of 0.11% and 0.10%, respectively. XOP and AMLP are more expensive, with ratios of 0.35% and 0.85%, respectively.
ESG Energy ETFs
Turning to the ESG market, four of the largest energy ESG ETFs include the iShares Global Clean Energy ETF (NASDAQ:ICLN), Invesco Solar ETF (NYSEARCA:TAN), First Trust NASDAQ Clean Edge Green Energy Index Fund (QCLN) and the ALPS Clean Energy ETF (ACES).
One-Month Returns: ICLN -8.1%, TAN -10.2%, QCLN -5.5%, and ACES -8.7%.
One-Year Returns: ICLN -23.3%, TAN -25.3%, QCLN -23.1%, and ACES -29.2%.
Three-Year Returns: ICLN +69.2%, TAN +134.3%, QCLN +152.6%, and ACES +66.5%.
The returns for the traditional oil funds have been boosted this year by the early runup in crude prices. While crude (CL1:COM) remains off the highs it reached in June, it is still well above levels touched last December. Meanwhile, the commodity is higher over the past month as well, following a long swoon from June into September.
At the same time, the ESG funds include a number of names involved in green-energy technology. These stocks have been under pressure in 2022 with the rapid pace of interest rate increases.
Here's a breakdown of Seeking Alpha’s Quant Ratings for the ESG group:
Each of these funds is more expensive than the counterparts in the traditional energy ETFs, except AMLP, which has the highest expense ratio of any of the funds looked at here.
Within the ESG group, QCLN and ACES are near the high end of the expense scale, with ratios of 0.58% and 0.56%, respectively. ICLN is the cheapest of the group, at 0.4%, while TAN comes in with an expense ratio of 0.65%.
Other Energy ETFs
While the funds covered above represent a snapshot view of how traditional funds and their ESG alternatives have stacked up recently, the examples given only represent a portion of the energy funds on the market.
Moreover, Wall Street’s obsession with ESG-based ETFs is no secret. But while the label "ESG" promises a three-pronged approach to sustainable investing, only one part of this gets most of the attention.