Perspective ETFs in the ESG energy segment: Vanguard Energy ETF
Commodity prices have been surging since the end of 2021 and positively affecting companies from this sector. The VDE share price rose by 35%, while dividend yields are at 3.15%, 300% above the same figure for PBD. P/E ratio for VDE is at low 8.5. No factors that could change the upside trend can be seen on the horizon.
Other bullish factors for the VDE could be mentioned. The spread between Treasuries yields and yields from the energy sector is positive and quite attractive. The yield for 10-year Treasuries rose from 1.7% to 3.1%, while the energy sector is the only one that beats this yield, while other sectors are far behind in the negative zone. The U.S. government was, to a large extent, dependant on low inflation and GDP expansion to lower borrowing costs and outpace growing debt burden. It has no other choice than to follow this strategy. So, sectors with high yields will remain the most attractive.
The VDE portfolio consists of 103 shares, while 65% of the Fund’s assets are allocated to the top 10 companies. The MSCI US investable Market Energy 25/50 Index is the underlying asset for the Fund that has $7.9 billion under management. The Energy Select Sector SPDR Fund (XLE) that has S&P Energy Select Sector Index as an underlying asset could be an alternative to ETF. This ETF contains shares of 23 companies, while 75% of $35.4 billion under management is allocated to the top 10 assets within the Fund. The dynamics of both VDE and XLE shares are mostly similar.
Considering the above, placing a large about of capital in the investment of a number of top energy stocks, such as Chevron, Exxon Mobile etc, could be considered risky. A sudden drop in energy prices may lead to negative consequences for investors. The other major risk is dividends that are linked not only to companies’ fundamentals but also to other factors. Investments could also be drastically affected by changes to local taxes and the government’s tolerance to global energy giants.