Oil prices have raced higher, propelling energy stocks and ETFs. Options abound, so which is the better energy ETF for investors — the Fidelity MSCI Energy Index ETF (NYSEARCA:FENY) or the iShares U.S. Energy ETF (NYSEARCA:IYE)?
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The favorable backdrop for the energy sector makes it a good time to compare these two popular energy ETFs from two asset management giants. These are both good ETFs, and they have a lot in common, but as we’ll discuss below, one is the clear-cut winner.
An Attractive Time to Invest in Energy ETFs
Oil prices have climbed higher in 2024, pushing energy stocks and ETFs to new highs. FENY is up 13% year-to-date, while IYE is up 12.4%.
Energy stocks have performed well for a variety of reasons. Production cuts by OPEC+ nations look set to remain in place through the second quarter at a time when demand is increasing. Additionally, economic activity in China is picking back up, European nations are working to refill their oil reserves, and demand for gasoline in the U.S. is increasing ahead of what is expected to be a busy summer of travel. At the same time, geopolitical tensions in the Middle East and in Eastern Europe have kept prices higher.
In the longer term, energy stocks continue to look attractive. For one thing, while they have performed well, they are still far cheaper than the broader market at a time when investors appear to be increasingly concerned about the high valuations that some of the market’s leaders have raced out to.
While the S&P 500 (SPX) trades at 23.2 times earnings, ExxonMobil (NYSE:XOM) and Chevron (NYSE:CVX), the top two holdings for both FENY and IYE, trade at comparatively cheap valuations of 13.1 and 12.2 times earnings, respectively. Many other energy stocks feature even cheaper valuations.
Furthermore, the long-term supply and demand dynamics may favor these energy producers more than many expect as demand rises based on population growth and additional energy usage in developing nations. Analysts from JPMorgan (NYSE:JPM) believe the global oil market could face a shortage of 1.1 million barrels per day in 2025 and that this gap could increase to 7.1 million barrels per day at the start of the next decade.
What Are the FENY and IYE ETF’s Strategies?
Both of these ETFs are similar in that they are funds from asset management giants that invest in U.S. energy stocks and have similar AUMs (assets under management).
IYE “seeks to track the investment results of an index composed of U.S. equities in the energy sector” and gives investors “exposure to U.S. companies that produce and distribute oil and gas.” Its underlying index is called the Russell 1000 Energy RIC 22.5/45 Capped Gross Index.
On the other hand, FENY is a $1.9 billion ETF from Fidelity that “invests at least 80% of assets in securities included in MSCI USA IMI Energy 25/50 Index.” This is a modified market cap-weighted index that invests in small-, mid- and large-cap energy stocks.
Head-to-Head Portfolio Comparison
Both funds invest in U.S. energy stocks, and there is, thus, plenty of overlap between their portfolios. However, FENY is more diversified than IYE.
FENY holds 116 stocks, and its top 10 holdings make up 65.9% of the fund. Below, you’ll find an overview of FENY’s top 10 holdings using TipRanks’ holdings tool.
Meanwhile, IYE holds far fewer positions with 41 holdings, and it is somewhat more concentrated, as its top 10 holdings account for 71.2% of the fund.
Below, you’ll find an overview of IYE’s top 10 holdings using TipRanks’ holdings tool.
The two funds have similar lists of top 10 holdings, sharing nine of the same top 10 holdings (albeit with different weightings), with the sole difference being that Occidental Petroleum (NYSE:OXY) replaces Williams Companies (NYSE:WMB) in IYE’s top 10 holdings.
Of note, ExxonMobil is the top holding for both funds and accounts for large weightings of 22.8% within FENY and 22.95% within IYE.
Both funds’ groups of top holdings are rated highly by TipRanks’ Smart Score system. The Smart Score is a proprietary quantitative stock scoring system created by TipRanks. It gives stocks a score from 1 to 10 based on eight key market factors. A score of 8 or above is equivalent to an Outperform rating. An impressive seven of each ETF’s top 10 holdings feature Outperform-equivalent Smart Scores of 8 or above. Both ETFs feature Outperform-equivalent ETF Smart Scores of 8 out of 10.
Dividend Overview
Energy stocks are often prized by income investors for their attractive dividend yields and consistent payouts, so it comes as no surprise that these are both dividend ETFs. IYE yields 2.5%, while FENY offers a higher yield of 2.8%.
IYE has an impeccable track record as a dividend payer. It has paid dividends to its holders for a remarkable 23 consecutive years since it was launched in 2000. Because it launched later, FENY hasn’t had time to compile quite the same impressive dividend history that IYE has, but it has still paid dividends to its holders for 10 years in a row — every year since its 2013 inception.
Fees: Where the Rubber Meets the Road
While the two energy-focused ETFs are similar in many ways, the fees that they charge is a significant area where they differ.
IYE has an expense ratio of 0.40%, meaning that an investor allocating $10,000 into the fund will pay $40 in fees over the course of a year. While this isn’t exorbitant by any means, it is significantly more than the 0.08% that FENY charges. FENY’s low fee means that an investor in FENY will pay just $8 over the course of a year.
The disparity between these fees becomes more apparent over time as the differences compound. For example, let’s assume each ETF maintains its current expense ratio and returns 5% per year. After 10 years, the investor putting $10,000 into IYE will pay $505 in fees, while the investor in FENY will pay just $108 in fees.
Ultimately, IYE is five times more expensive than FENY, making FENY the clear bargain.
Is IYE Stock a Buy, According to Analysts?
Turning to Wall Street, IYE earns a Moderate Buy consensus rating based on 32 Buys, 10 Holds, and zero Sell ratings assigned in the past three months. The average IYE stock price target of $55.46 implies 13.3% upside potential.
Is FENY Stock a Buy, According to Analysts?
Turning to Wall Street, FENY earns a Moderate Buy consensus rating based on 92 Buys, 22 Holds, and three Sell ratings assigned in the past three months. The average FENY stock price target of $29.24 implies 14% upside potential.
As you can see, analysts forecast a similar amount of upside in the two ETFs.
The Clear Winner
The two ETFs have plenty of overlap in terms of their holdings, and they both have similar dividend yields. Also, analysts forecast similar potential upside for the two. However, while the two ETFs feature plenty of similarities, IYE is five times more expensive than FENY in terms of its expense ratio, making FENY the clear-cut winner in a contest where little else separates them. FENY also offers a bit more diversification and a slightly higher yield, but the fee is the main difference-maker.
I’m bullish on FENY, given its exposure to top energy stocks (at a time when this sector of the market looks to continue its strong performance), its attractive dividend yield, and its low fees.
