An energy ETF, or exchange-traded fund, offers investors exposure to the energy sector. These ETFs track various assets, including sector indices, sub-sectors, or commodities, by investing in companies involved in oil, gas, and renewable energy.
By investing in energy ETFs, investors can diversify their risk across a broader range of companies, avoiding the need to pick individual firms. Energy ETF shares can be traded on an exchange just like regular stocks.
What is energy ETF?
Firstly, let us understand ETFs (Exchange Traded Funds). They are investment vehicles or money pools traded on stock exchanges, much like stocks. ETFs are specifically designed to track the performance of a particular:
- Index
- Commodity
- Bond, or
- A combination of assets
Energy ETFs focus specifically on companies, commodities, and indices operating within the energy sector. Let us understand this better using an example.
- Say XYZ ETF Energy mirrors the Nifty Energy Index.
- This ETF delivers returns that closely match the overall performance of the Nifty Energy Index.
- This ETF invests in a basket of energy sector stocks listed on the National Stock Exchange of India (NSE).
What assets are popularly tracked by energy ETFs?
Energy ETFs primarily monitor the performance of various assets within India's energy sector, including stocks and indices. Let us take a look at the key assets monitored by Indian energy ETFs:
1. Indices
Nifty Energy Index |
S&P World Energy (Sector) Index |
|
|
2. Stocks
Let us look at the top constituents tracked by the energy ETFs:
- Reliance Industries Ltd.
- Oil & Natural Gas Corporation (ONGC)
- Adani Green Energy Ltd.
- Indian Oil Corporation (IOC)
- GAIL (India) Ltd.
- NTPC Ltd.
- Power Grid Corporation of India Ltd.
How does an energy ETF work?
As is the case with all the ETFs, energy ETFs also pool money from multiple investors and invest them in a diversified portfolio of assets, which specifically focus on the energy sector. Let us understand the functioning of an energy ETF through a hypothetical example:
The investment
- Say an investor decides to invest Rs. 50,000 in an energy ETF India.
- They purchase 100 shares of the ETF at Rs. 500 per share.
- This ETF tracks the performance of a combination of 10 popular energy stocks listed on the NSE.
- All the stocks are equally weighted.
- The ETF allocates Rs. 50,000 across all the 10 energy stocks.
- This way, the investor gains exposure of Rs. 5,000 in each of the energy stocks tracked by the ETF.
The profit realisation
- Over time, the investor monitors the performance of the energy sector.
- After a period of positive performance, the energy ETF is now trading at Rs. 600 per share.
- The investor sells all 100 shares of the ETF at this price.
- They realised a total of Rs. 60,000 from the sale.
- This way, the investor earned a profit of Rs. 10,000
How can you invest in the energy ETFs?
Let us understand the investment process through some easy steps:
Step I: Choose an energy ETF
- Research and select an energy ETF that aligns with your investment goals and risk tolerance.
- You can consider ETFs that track specific energy sectors, such as:
- Oil and gas
or - Broader energy indices
- Oil and gas
Step II: Open a trading account
- Open a trading account with a reputable online brokerage firm.
- Make sure the brokerage firm offers ETF trading services.
Step III: Fund your account
- Deposit funds into your trading account using a payment method accepted by the brokerage firm.
- This could include:
- Bank transfers
- Credit cards, or
- Other electronic payment methods
Step IV: Search for the ETF
- Search for your chosen ETF using the brokerage firm's:
- Online platform or
- Mobile app
- You can also use the ETF's ticker symbol or name to locate it.
Step V: Place an order and monitor
- Place a buy order for the desired number of shares of the energy ETF.
- Keep monitoring your investment's performance.
- Adjust your portfolio as needed.
- Always try to maintain your desired level of exposure to the energy sector.
Why should you invest in energy ETFs?
One of the major benefits of investing in energy ETFs is diversification. By adding them to a portfolio, you gain exposure to this sector's performance, which may behave differently from other sectors such as technology, healthcare, or consumer goods. This helps you reduce the impact of sector-specific risks on the overall portfolio.
Additionally,
- You can earn dividends:
- Many energy ETFs focus on companies that pay dividends, such as major oil companies
- By holding these ETFs, you can also earn income in the form of dividends
- You can hedge against inflation:
- Energy ETFs, particularly those with exposure to commodities like oil and natural gas, can serve as a hedge against inflation
- Energy prices often rise during periods of inflation
- You can benefit from this price increase and maximise your overall returns
Conclusion
Energy ETFs are investment pools that track the performance of major indices, stocks, and commodities specifically operating in the energy sector. By investing in energy ETFs, investors gain exposure to the energy sector's performance in India. Also, it helps diversify and allows investors to gain from sector-specific growth opportunities. Often, power ETFs invest in oil companies, which can be a good option for earning dividend income.
Related articles:
How to invest in the Stock Market?
ETFs vs. Stocks: Which Should You Invest In
