The word “trillion” doesn’t get tossed around much — even in finance.
There are only a few things that can be measured in trillions, like gross domestic product (GDPs), national debts, and the global oil market.
Last year, the world consumed an average of 99 million barrels of oil per day. Multiply that by an average price of $70 per barrel, and multiply that by 365 days in a year, and you get a yearly global oil expenditure of $2.53 trillion.
Global oil consumption has been steadily growing for 10 years, and it’s almost certain to keep growing in the years ahead.
With numbers like these, oil companies are must-haves for every investor’s portfolio.
But, of course, not all oil investments are created equal. There are a few different ways to invest in the industry, and each has its quirks. Upstream exploration companies are volatile, midstream master limited partnerships (MLPs) have unusual financials, and downstream refiners are subject to confusing seasonal changes in demand.
Oil exchange-traded funds (ETFs) solve many of these problems, but even they aren’t always perfect. Too many investors are holding oil funds that are unnecessarily expensive, annoyingly illiquid, or poorly allocated.
As a new Energy and Capital subscriber, you deserve better. That’s why our research team put together this free report outlining the three best oil ETFs to buy and hold forever.
Below, we’ll look at one upstream ETF, one midstream ETF, and one downstream ETF. Each is set to outperform its peers in the coming years.
iShares US Oil & Gas E&P ETF (BATS: IEO) — The Best Upstream Oil ETF
The upstream segment of the oil industry consists of oilfield services companies like Halliburton (NYSE: HAL) as well as exploration and production (E&P) companies like ConocoPhillips (NYSE: COP).
The upstream segment is an essential part of the world’s energy industry. After all, it’s responsible for actually locating oil and gas deposits and extracting them from the ground. And when an E&P company makes a big discovery, its shareholders can see huge upside.
But this business model also exposes upstream oil companies to a lot of volatility. Decreases in the market price of oil can be disastrous for them — as can exploration projects that fail to find usable reserves.
Upstream oil ETFs reduce these risks through diversification. There are three major upstream ETFs on the market today: the SPDR S&P Oil & Gas E&P ETF (NYSE: XOP), the iShares US Oil & Gas E&P ETF (BATS: IEO), and the Invesco Dynamic Energy E&P ETF (NYSE: PXE).
The iShares ETF isn’t quite the cheapest in terms of expense ratio; its 0.42% fee is slightly higher than the SDPR ETF’s 0.35% fee. But it’s much lower than the Invesco ETF’s 0.63% fee. And the iShares ETF’s dividend yield of 2.04% blows the SPDR and Invesco ETFs’ yields (1.49% and 1.71%, respectively) out of the water.
With these numbers in mind, the iShares US Oil & Gas E&P ETF is the clear winner among upstream oil funds.
Global X MLP ETF (NYSE: MLPA) — The Best Midstream Oil ETF
Midstream oil companies are those that transport oil from its extractors (upstream companies) to its refiners and users (downstream companies).
These middlemen operate pipelines as well as rail, truck, and ship networks which transport millions of barrels of oil from point A to point B every day. Many are organized as master limited partnerships (MLPs), a unique type of business structure that maximizes cash flow and minimizes federal tax liability.
Many midstream MLPs make their money through lucrative long-term contracts with upstream companies or per-barrel fees. Thus, they’re relatively insulated from changes in the market price of oil. They also use their generous cash flows to pay even-more-generous dividends.
There are five highly liquid midstream ETFs available to investors: the Alerian MLP ETF (NYSE: AMLP), the Global X MLP ETF (NYSE: MLPA), the Global X MLP & Energy Infrastructure ETF (NYSE: MPLX), the InfraCap MLP ETF (NYSE: AMZA), and the VanEck Vectors High Income MLP ETF (NYSE: YMLP).
Out of these, the Global X MLP ETF has the lowest expense ratio (0.45% compared to an average of 0.99%) and one of the highest dividend yields at 9.6%.
That combination of low expense ratio and a near-double-digit yield gives MLPX a clear edge over other midstream ETFs.
VanEck Vectors Oil Refiners ETF (NYSE: CRAK) — The Best Downstream Oil ETF
In oil industry terms, downstream companies are those that refine oil into higher-value petroleum products like naphtha, gasoline, kerosene, and asphalt.
These companies are invaluable components of the oil industry. After all, they manufacture the products actual consumers buy but can be tough to invest in.
Like upstream companies, downstream companies can be quite sensitive to changes in the market price of oil. They may also be subject to significant seasonal trends. Some petroleum products, such as natural gas, are more in demand in the winter than in the summer. Others, like gasoline, have to be refined differently in the winter than in the summer.
The VanEck Vectors Oil Refiners ETF (NYSE: CRAK) provides an easy remedy to these problems by diversifying its holdings across 25 downstream oil companies from around the world.
Its relatively low expense ratio of 0.60% and respectable 1.76% dividend make it an easy addition to any oil investor’s portfolio.
These three categories of oil companies — upstream, midstream, and downstream — are all easier to hold for the long term in ETF form. And as a newly minted Energy and Capital subscriber, you deserve to own best ETFs available for each of these categories.
After all, poorly chosen long-term holdings can significantly reduce your returns. That’s why it’s important to look for funds with low expense ratios, high yields, and time-tested management.
The iShares US Oil & Gas E&P ETF (BATS: IEO), the Global X MLP ETF (NYSE: MLPA), and the VanEck Vectors Oil Refiners ETF (NYSE: CRAK) are clear winners by these metrics.
Oil investors who are looking for shorter-term gains should check out Energy Investor. Editor Keith Kohl just released a fascinating report about a small group of obscure energy stocks with unusually high dividends. Click here to learn more.