Which Energy ETF Fits Your Portfolio? State Street Energy Select Sector SPDR ETF (XLE) or the Alerian MLP ETF (AMLP)?

While the State Street Energy Select Sector SPDR ETF (NYSEMKT:XLE) offers broad energy exposure with a significantly lower expense ratio, the Alerian MLP ETF (NYSEMKT:AMLP) provides targeted midstream exposure and a higher distribution yield.

Investors looking for energy exposure must choose between broad-based equity funds and specialized infrastructure vehicles. This comparison evaluates the State Street Energy Select Sector SPDR ETF, which tracks the S&P 500 energy sector, against the Alerian MLP ETF, which focuses on energy infrastructure and transportation companies.

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.

The State Street Energy Select Sector SPDR ETF is notably more affordable for investors, with an expense ratio that is 0.93 percentage points lower than the Alerian MLP ETF. However, the Alerian fund provides a significantly higher payout for those focused on current income.

Performance & risk comparison

What's inside

The State Street Energy Select Sector SPDR ETF is designed to mirror the return of the Energy Select Sector Index, providing exposure to oil, natural gas, and consumable fuels. Its portfolio comprises 21 holdings, representing the energy constituents of the S&P 500. Its largest positions include ExxonMobil Holdings Corp (NYSE:XOM) at 23.80%, Chevron Corp (NYSE:CVX) at 18.09%, and ConocoPhillips (NYSE:COP) at 6.72%. The fund was launched in 1998. State Street Energy Select Sector SPDR ETF has paid $1.52 per share over the trailing 12 months, which, on its recent ~$62.10 share price, works out to a 2.5% yield.

The Alerian MLP ETF tracks an index of energy infrastructure master limited partnerships that derive most of their cash flow from transporting and processing energy commodities. This fund holds 14 securities and is considered non-diversified due to its narrow focus on midstream assets. Its top holdings include Sunoco LP (NYSE:SUN) at 12.46%, Mplx Lp (NYSE:MPLX) at 12.12%, and Plains All American Pipeline LP (NASDAQ:PAA) at 12.08%. The fund was launched in 2010. Alerian MLP ETF has paid $4.07 per share over the trailing 12 months, which, on its recent ~$52.93 share price, works out to a 7.8% yield.

For more guidance on ETF investing, check out the full guide at this link.

Which looks like the better buy

To compare the State Street Energy Select Sector SPDR ETF (XLE) and the Alerian MLP ETF (AMLP), investors should consider several key details. Let's see what they tell us about each fund.

To begin, we should discuss the greatest contrast between these two funds: strategy. XLE focuses on traditional energy stocks. Its largest holdings are oil and gas majors like ExxonMobil, Chevron, and ConocoPhillips. AMLP, on the other hand, focuses on master limited partnership stocks. These are partnerships that tend to be midstream oil and gas companies. MLPs have a special tax status and treatment that differ from traditional stocks.

Two other important factors are historical performance and income potential. As for performance, XLE has an edge. Since 2016, the fund has generated a total return of 162%, with a compound annual growth rate (CAGR) of 10.1%. AMLP, meanwhile, has delivered an 88% total return, with a 6.5% CAGR. Both funds have underperformed the S&P 500 over this period. Turning to income potential, AMLP has a significant advantage. AMLP boasts a stout dividend yield of 7.85%, while XLE's dividend yield is 2.48%.

One final factor to weigh is cost. On this measure, XLE is the clear winner. XLE's expense ratio is only 0.08%. AMLP, by contrast, has an expense ratio of 1.01%. That means an investor who puts $10,000 into each fund will pay $8 per year in fees for their XLE shares but $101 per year in fees for their AMLP shares. Over time, those fees can really add up.

To conclude, although XLE and AMLP are both energy ETFs, they differ in many ways. XLE is the clear choice for investors seeking simple energy exposure, thanks to its low fees, exposure to major oil and gas stocks, and its moderate dividend yield. AMLP is for investors seeking exposure to a basket of MLPs. It offers exception income potential through its 7.85% dividend yield, but its high fees make it a poor choice for cost-conscious investors.

Jake Lerch has positions in ExxonMobil. The Motley Fool has positions in and recommends Chevron. The Motley Fool recommends ConocoPhillips. The Motley Fool has a disclosure policy.