What Is the Vanguard Energy ETF (VDE) and Who Should Buy It?

Energy is the fuel for the world economy. So investing in energy stocks can be a good move if you want to own a piece of this fundamental sector that is so important to everyday life. But not all energy exchange-traded funds (ETFs) are the right choice for every investor.

The Vanguard Energy ETF (NYSEMKT: VDE) is a low-cost index fund that lets investors own 111 U.S. energy stocks. The fund has delivered 24.6% returns year to date, and 43.4% in the past year, strongly outperforming the S&P 500 index.

Let's look at more details on this Vanguard ETF to see who might want to add it to their portfolio, and who should stay away.

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Vanguard Energy ETF (VDE): 111 U.S. energy stocks, 10 years of 9.2% annualized returns

The Vanguard Energy ETF holds 111 U.S. energy stocks, including oil, natural gas, and coal companies involved with energy exploration and production. The fund has delivered annualized returns of 9.2% over the past 10 years, and 8.2% for the past (almost) 22 years since its inception in September 2004.

The ETF's top five stock holdings are energy majors ExxonMobil (22.0% of the fund), Chevron (14.2%), and ConocoPhillips (5.8%), midstream natural gas provider Williams Companies (3.6%), and oil services stock SLB (3.5%).

Why buy VDE...or not

The Vanguard Energy ETF could be a good choice for dividend-focused investors. It offers a strong dividend yield (X%), which is higher than some of the best dividend index funds. And the fund's price-to-earnings (P/E) ratio of 20.8 is cheaper than the S&P 500 index, which is trading at a P/E multiple of 32.4. The fund is on the list of the best energy ETFs.

But despite its strong recent returns, this energy ETF might not be a good buy. The biggest gains for this fund might have already happened earlier in 2026 during the lead-up to the Iran war. Now that the Iran war might be ending, oil prices are dropping -- and so are shares of this ETF. In the past five days, the Vanguard Energy ETF has lost about 5% while the S&P 500 has gained over 3%:

VDE Total Return Level data by YCharts

And in the long run, ever since the fund's inception, the Vanguard Energy ETF has underperformed the S&P 500. Even though energy is hugely important to everyday life, the energy sector is a small part of the stock market. Energy stocks make up only about 3% of the S&P 500. Betting too heavily on such a small sector might be putting too many eggs in one basket.

Unless you're passionate and well-informed about the energy sector or want high dividends, I wouldn't rate the Vanguard Energy ETF as a strong buy for most investors today.

Ben Gran has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chevron. The Motley Fool recommends ConocoPhillips. The Motley Fool has a disclosure policy.