Make Money in Energy Stocks the Easy Way


Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you expect the energy industry to thrive due to our world's insatiable and growing demand for energy, the Energy Select Sector SPDR ETF (NYS: XLE) could save you a lot of trouble. Instead of trying to figure out which companies will perform best, you can use this ETF to invest in lots of them simultaneously.

The basics
ETFs often sport lower expense ratios than their mutual fund cousins. The energy ETF's expense ratio -- its annual fee -- is a very low 0.20%.

This ETF has performed rather well over the long term, beating the S&P 500 handily over the past five and 10 years, on average. As with most investments, of course, we can't expect outstanding performances in every quarter or year. Investors with conviction need to wait for their holdings to deliver.

With a very low turnover rate of 8%, this fund isn't frantically and frequently rejiggering its holdings, as many funds do.

What's in it?
Several of this ETF's components made strong contributions to its performance over the past year. Chesapeake Energy (NYS: CHK) , for example, surged 48%. Many have been disgusted by its CEO's lavish compensation, but given the company's strong recent record, other investors don't worry about it too much. Chesapeake has been building a strong position in shale, and it aims to boost its liquid natural gas output. El Paso (NYS: EP) , up 60%, has more than 42,000 miles in its pipeline network, and its 27.5% annual average operating income growth rate leaves competitors such as Boardwalk Pipeline Partners (NYS: BWP) and Atmos Energy (NYS: ATO) in the dust.

Other companies didn't add quite as much to the ETF's returns last year, but could have an effect in the years to come. Occidental Petroleum (NYS: OXY) gained only 14% over the past year, but recently upped its capital expenditures by 62% to $6.8 billion, which bodes well for its growth prospects. Its chemical business doesn't get much attention, but has been contributing close to 20% of revenue recently. Peabody Energy (NYS: BTU) was roughly flat, but many are waxing bullish on coal these days, with Arch Coal expecting "a multiyear upswing in the coal market."

The big picture
Demand for energy isn't going away anytime soon. A well-chosen ETF can grant you instant diversification across any industry or group of companies -- and make investing in and profiting from it that much easier.

ETFs can help you find the way to better investing results. To find some great ETF investing ideas, take a look at The Motley Fool's special free report, "3 ETFs Set to Soar During the Recovery."

At the time thisarticle was published Longtime Fool contributorSelena Maranjianowns shares of Chesapeake Energy, but she holds no other position in any company mentioned.Click hereto see her holdings and a short bio. The Motley Fool owns shares of El Paso.Motley Fool newsletter serviceshave recommended buying shares of Chesapeake Energy. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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Originally published