Just because two or three exchange traded funds (ETFs) share a similar names, it doesn’t mean that they have the same investment focus. And simply because ETFs cover the same sector it doesn’t mean they all use the same index. It all comes down to this: not all sector ETFs are created equal.

Dan Caplinger for The Motley Fool says that how well they do depends on the performance of the components within each fund’s index, and those components vary widely from one ETF to another.

Taking a look at the energy sector:

• Energy Select SPDR (XLE): Has had an average annual return greater than 30% for the past five years. Exxon Mobil (XOM) and Chevron (CVX) make up around 1/3 of the portfolio and the expense ratio is 0.23%, which lessons the drag on returns.

• iShares Dow Jones US Energy (IYE): The performance trails XLE partly because of the 0.48% expense ratio. However, Exxon and Chevron are are weighted at around 40% of assets.

• PowerShares Dynamic Energy (PXI) The ETF weights companies such as Valero (VLO) and Marathon Oil (MRO) the same as it would to the larger integrated companies. The expense ratio is a heavy 0.71% and PXI has only a one-year track record.

It is plain to see that much research and inquiry is necessary to make an informed decision about ETFs that will fit into your portfolio. Be sure to understand your investment needs, and find the fund that best matches up with what you’re looking for.

Tags: Energy

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