Investing in energy can be a dynamic way to capitalize on growing and changing global energy demands. And it isn’t just about owning oil company stocks!
Yes, the energy market offers more diversity than you may realize. While you can invest in specific companies, you can also choose from exchange-traded funds (ETFs) and mutual funds, commodities, sustainable bonds, and more. Some offer simpler strategies and lower risks, while others are more complex and yield potentially higher returns. On that note, it’s vital to always discuss these investments with your financial advisor before making decisions.
To get you started, here are seven common ways to invest in energy and some considerations for each approach.
1. Individual Stocks in Energy Companies
The first strategy that may come to mind is investing in specific energy companies, including:
- Oil & Gas Majors: Large integrated oil companies like ExxonMobil, Chevron, and Shell dominate this sector. They often pay dividends, but their stock performance can be tied to oil prices.
- Renewable Energy Companies: These companies focus on wind, solar, hydro, and geothermal energy, such as NextEra Energy or Enphase Energy. This area has grown due to shifts toward clean energy and government incentives.
- Utilities: Companies that provide energy (e.g., electricity, natural gas, etc.) to consumers, such as Duke Energy or Dominion Energy, often have stable cash flows and pay dividends, making them attractive to income investors.
2. Exchange-Traded Funds (ETFs) & Mutual Funds
Energy ETFs and mutual funds allow investors to diversify their portfolios while mitigating the risks often accompanying the energy sector (e.g., market, commodity price, and geopolitical risks). Investors have a wide range of options among a few main categories:
- Broad Energy ETFs: Funds like the Energy Select Sector SPDR Fund (XLE) offer exposure to various energy stocks, including oil, gas, and renewables.
- Clean Energy ETFs: Funds focused on renewable energy, such as the iShares Global Clean Energy ETF (ICLN), invest in a variety of clean energy companies.
- Sector-Specific Funds: These funds may focus on a specific area, such as solar energy, wind, or natural gas. This allows for more targeted exposure within the energy sector.
3. Master Limited Partnerships (MLPs)
MLPs are companies involved in energy infrastructure, such as pipelines and storage. Their interests, called “units,” are traded like stock on public exchanges. MLPs pay out most of their earnings to investors as distributions.
An MLP may have one or more general partners who manage it, along with limited partners (i.e., investors who buy units but don’t have management roles).
They often have high dividends due to tax advantages. However, they can be volatile and sensitive to energy prices and regulatory changes. Check with your tax advisor on the tax implications and K-1 reporting that may come with MLP unit ownership.
4. Commodities & Futures
You can invest directly in energy commodities like crude oil, natural gas, and electricity through futures contracts. This is more advanced and risky, making it suitable for investors with a strong understanding of commodities training.
For easier access, commodity-focused ETFs track energy prices (e.g., United States Oil Fund [USO] or United States Natural Gas Fund [UNG]). These funds expose you to price movements in energy commodities without directly managing futures contracts.
5. Green & Sustainable Bonds
These bonds finance projects in renewable energy and sustainability. They’re available through various bond funds and ETFs and can offer fixed income with an impact focus. Issuers can include government entities, corporations, and supranational organizations like the World Bank.
6. Private Equity & Venture Capital
For accredited investors, private equity offers investment opportunities in early-stage energy companies or projects, often in renewables. This approach is high-risk but can offer high rewards, especially with the growth in clean energy technology.
7. Real Estate & Infrastructure Investment Trusts (REITs)
Some REITs invest in infrastructure like energy storage, solar farms, or energy-efficient buildings. Infrastructure-focused REITs or ETFs allow investors to gain indirect exposure to energy and utility assets.
Whether you’re looking for stability or growth, the energy sector offers various pathways to match different investment goals and risk profiles.
So, if you’re searching for energy investments that suit your portfolio, let’s chat! Contact Carlson Investments today, and an advisor will be happy to tailor an investment strategy based on your situation.
None of the above-mentioned stocks or ETFs should be considered investment advice. They are for illustration purposes only.
Carlson Investments does not provide tax, legal, or accounting advice. This content has been written for informational purposes only. Always consult your individual tax, legal, or financial professionals for advice tailored to your situation.
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