Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you expect the oil and gas industry to thrive due to our planet's growing demand for energy, the SPDR S&P Oil & Gas Exploration and Production ETF (NYSE: XOP ) could save you a lot of trouble. Instead of trying to figure out which companies will perform best, you can use this ETF to invest in lots of them simultaneously.
ETFs often sport lower expense ratios than their mutual fund cousins. This oil and gas ETF's expense ratio -- its annual fee -- is a low 0.35%.
This ETF has performed very well, trouncing the market over the past three and five years, on average. As with most investments, of course, we can't expect outstanding performances in every quarter or year. Investors with conviction need to wait for their holdings to deliver.
What's in it?
Several of this ETF's components made strong contributions to its performance so far this year. Brigham Exploration (Nasdaq: BEXP ) , up 34% in 2011, has been profiting from Bakken shale oil. It's been the fastest-growing company in that field, and appears to be well run: When companies such as Abraxis Petroleum (Nasdaq: AXAS ) were significantly slowed by bad weather last winter, Brigham was not. Fellow ETF holding GeoResources (Nasdaq: GEOI ) , up 15%, has also been doing well in the Bakken and enjoys fat profit margins.
Other companies haven't added as much to the ETF's returns in 2011 but could have an effect in the years to come. Northern Oil and Gas (AMEX: NOG ) is down 16% this year. Yet it has been posting explosive growth in revenue and earnings, has been very successful with its drilling, and has many acres left to develop in Bakken and elsewhere. McMoRan Exploration (NYSE: MMR ) , down 15%, has some worried about its focus on Gulf of Mexico exploration.
The big picture
Demand for oil and gas isn't going away anytime soon. A well-chosen ETF can grant you instant diversification across any industry or group of companies -- and make investing in and profiting from it that much easier.
Learn about the best dividend ETFs. And if you're looking for some great investments beyond ETFs, consider these 10 stocks for your retirement portfolio.