The Best Oil and Gas ETF to Invest $1,000 in Right Now

It doesn’t take a stock market genius to know where the big money has moved in recent days. The aftermath of the attack on Iran by the U.S. and Israel has caused energy stocks to soar.

Exchange-traded funds (ETFs) offer a way for investors who aren’t comfortable picking individual winners to profit from the energy stock boom. But what’s the best oil and gas ETF to invest $1,000 in right now?

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Own the energy giants

There are several good choices, but I think the best oil and gas ETF to buy is the State Street Energy Select Sector SPDR ETF (XLE 1.28%). This ETF owns 22 of the strongest energy stocks on the market.

Importantly, three energy giants make up 48% of the State Street Energy Select Sector SPDR ETF’s total assets: ExxonMobil (XOM 1.57%), Chevron (CVX 1.60%), and ConocoPhillips (COP 2.49%). These three companies rank among the world’s largest energy companies by market cap.

With Iran effectively blocking traffic through the Strait of Hormuz, oil produced in the U.S. Permian Basin has become a hot commodity. ExxonMobil, Chevron, and ConocoPhillips are among the largest oil producers in the Permian Basin, with ExxonMobil holding the top spot.

Unsurprisingly, the performance of these three stocks closely tracks that of the State Street Energy Select Sector SPDR ETF. All four assets have soared more than 20% year to date.

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NYSEMKT: XLE

Select Sector SPDR Trust - State Street Energy Select Sector SPDR ETF

Today’s Change

(-1.28%) $-0.72

Current Price

$55.60

Key Data Points

Day’s Range

$55.37 - $56.46

52wk Range

$37.24 - $57.88

Volume

89M

An “anti-bubble” alternative

No one knows how long the Middle East crisis will last. It’s quite possible that oil prices (and energy stocks) could decline sharply in the coming months. Investing in the State Street Energy Select SPDR ETF provides a relatively safe alternative if the bubble bursts.

The ETF’s top three holdings are integrated major oil and gas companies that operate across the full spectrum of the oil and gas industry, from exploration to refining and distribution. If oil prices drop, ExxonMobil’s, Chevron’s, and ConocoPhillips’ diversified business models should provide a cushion that smaller oil and gas exploration companies can’t. I think this makes the State Street Energy Select SPDR ETF a better option than other oil and gas ETFs.

This fund is also valued attractively despite the recent surge in oil prices. Its trailing 12-month price-to-earnings ratio is only 20x, well below the S&P 500’s (^GSPC 0.21%) earnings multiple of 29x.

Last, but not least, the State Street Energy Select SPDR ETF pays investors solid income regardless of how oil and gas prices fluctuate. Its distribution yield currently stands at 2.6%.