Investors choosing between State Street Energy Select Sector SPDR ETF (NYSEMKT:XLE) and iShares Global Clean Energy ETF (NASDAQ:ICLN) face a choice between low-cost traditional fossil fuel exposure and a broader, utility-heavy renewable energy basket.
Both funds target the energy industry but offer fundamentally different strategies. While the State Street fund tracks the performance of large-cap energy companies within the S&P 500, ICLN focuses on global companies that produce energy from renewable sources like solar and wind. This comparison highlights how these distinct approaches impact cost, volatility, and historical returns, noting that the State Street fund has $39.5 billion in assets under management (AUM) compared to the iShares fund at $2.4 billion.
Snapshot (cost & size)
Beta measures price volatility relative to the S&P 500; beta is calculated from monthly returns over the available fund history (up to five years). The 1-yr return represents total return over the trailing 12 months. Dividend yield is the trailing-12-month distribution yield as of the close of trading on July 23.
The State Street fund is significantly more affordable, sporting an expense ratio of 0.08%, which is nearly five times lower than the 0.39% charged by the iShares fund. Investors looking for income may also prefer XLE, as it offers a higher payout with its 2.60% trailing-12-month dividend yield.
Performance & risk comparison
What’s inside
The State Street Energy Select Sector SPDR ETF holds 21 companies, providing 100% exposure to the energy sector. Its largest positions include Exxonmobil Holdings (NYSE:XOM) at 20.3%, Chevron (NYSE:CVX) at 14.4%, and ConocoPhillips (NYSE:COP) at 5.9%. This fund was launched in 1998 and is engineered to mirror the price appreciation and dividend income of the Energy Select Sector Index. It grants precise access to oil, natural gas, and consumable fuel firms.
iShares Global Clean Energy ETF takes a broader approach with 105 holdings across several sectors, including technology at 34%, and utilities at 33%, and industrials at 31%. Its top holdings include Bloom Energy Inc (NYSE:BE) at 14.8%, First Solar Inc (NASDAQ:FSLR) at 8.4%, and Nextpower Inc (NYSE:NXP) 7.3%. This fund incorporates an ESG screen and focuses on sustainable power solutions globally, mirroring an index of international companies. It was launched in 2008. iShares Global Clean Energy ETF has paid $0.18 per share over the trailing 12 months, which on its recent ~$18.37 share price works out to a 1.00% yield.
Which fund is the better buy?
These two ETFs take a very different approach to investing in the energy business. The State Street fund, XLE, holds the biggest names in the U.S. oil and natural gas industry, providing exposure to producers and retailers like ExxonMobil and Chevron. About half the fund is in large-cap stocks.
ICLN, the iShares offering, is focused on renewable energy companies and so avoids fossil fuel producers altogether. It also is stylistically a more diverse ETF, holdings just less than half its assets in its top 10 holdings (XLE is close to three quarters in its top 10). About 23% of ICLN is in small cap stocks, 39% in mid caps, and the balance in large caps. Unlike XLE, which is all domestic U.S. oil and gas businesses, ICLN is also geographically more diverse, with about 40% of the fund in U.S. businesses, 29% in emerging Asian markets, and the balance in both developed markets and other emerging markets.
In some ways, deciding between these funds is a decision about whether you believe renewable energy will continue to grow in importance or if fossil fuels in the U.S. will continue to dominate. Solar and wind are now the cheapest and second-most-cheapest, respectively, way to produce electricity on a utility scale, easily cheaper than natural gas and other methods, according to the investment bank Lazard. But U.S. oil and gas stocks benefit from the rise in global prices from the Iran war, meaning they should be able to bring in more net income due to elevated prices at the gas pumps.
Performance-wise, ICLN beats XLE on the 10-year time frame, with annualized returns of 10.7% to 8.9% for XLE. ICLN however lost about 1% in the five-year look-back, reflecting the volatilityu to renewable energy, which is highly sensitive to hikes in interest rates and global tariffs. In the past three months, however, ICLN is up 13% whiole XLE has lost 13%.
The best choice here is ICLN, given the macro trend toward renewable energy resources. For investors who can wait out near-term volatility, it’s the fund to buy.
For more guidance on ETF investing, check out the full guide at this link.
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Brendan Coffey has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bloom Energy, Chevron, First Solar, and Nextpower. The Motley Fool recommends ConocoPhillips. The Motley Fool has a disclosure policy.
For Energy Investors, Is a Traditional Energy ETF a Better Bet Than Clean Energy? was originally published by The Motley Fool
