State Street Energy ETF vs Alerian MLP ETF: Which Is the Better Energy Fund?

Choosing between State Street Energy Select Sector SPDR ETF (XLE +0.91%) and Alerian MLP ETF (AMLP +1.41%) requires weighing the State Street fund’s low costs against the Alerian fund’s high-yield infrastructure focus.

Both funds target the energy sector, but through vastly different lenses. One tracks the broad energy giants of the S&P 500, while the other isolates the niche world of master limited partnerships that operate pipelines and storage facilities moving North American fuel.

Snapshot (cost & size)

Beta measures price volatility relative to the S&P 500; beta is calculated from five-year monthly returns. The 1-yr return represents total return over the trailing 12 months. Dividend yield is the trailing-12-month distribution yield as of the closing price of June 23..

The State Street Energy Select Sector SPDR ETF is significantly more affordable, with an expense ratio of 0.08%, compared to 1.01% for the Alerian MLP ETF. However, the Alerian fund offers a higher payout to income seekers.

Performance & risk comparison

What’s inside

The State Street Energy Select Sector SPDR ETF holds 21 companies, providing 100.00% exposure to the energy sector. It was launched in 1998. Its largest positions include Exxon Mobil (XOM +0.34%) at 22.1%, Chevron (CVX +0.46%) at 16.6%, and ConocoPhillips (COP 0.48%) at 6.8%. It has a trailing-12-month dividend of $1.88 per share.

In contrast, the Alerian MLP ETF is a non-diversified fund launched in 2010 that holds 20 energy infrastructure master limited partnerships. It allocates 98% to energy and 2% to utilities. Its largest positions include Plains All American Pipeline LP (PAA +0.70%) at 13.8%, Western Midstream Partners LP (WES +1.59%) at 13.6%, and Sunoco (SUN +4.18%) at 13.4%. It has paid $4.02 per share over the trailing 12 months.

Which is the better fund?

These are two intriguing funds for energy-minded investors.

The State Street Energy Select Energy Sector SPDR, XLE, is structured like a typical ETF, holding the common stock of major energy firms. The fund is heavy in large producers and retailers such as ExxonMobil, ConocoPhillips, and Chevron. Given the straightforward nature of its holdings, very large, liquid stocks, the XLE has a quite affordable expense ratio of 0.08%. Fund performance has been good, returning about 13.5% over the 3-year time frame,  close to 21% over the 5-year period, and 9.7% over the 10-year lookback.

The downside of the State Street fund is that many of its holdings are in the S&P 500, so an investor may already have exposure to many of the names. The relatively small amount of component stocks is a concentration concern, too.

The Alerian MLP ETF, AMLP, comes with a much higher expense ratio, but there’s a reason for that. MLPs — master limited partnerships — are a common structure for midstream oil and gas businesses. The structure means that MLPs don’t pay taxes, instead handing the tax bill to investors who receive distributions. Investing directly means handling K-1 forms for each MLP, which is a time-consuming and sometimes confusing tax-time hassle. This ETF simplifies investing in MLPs by handling the accounting itself and sending shareholders a single 1099 to use with their taxes. It’s simpler for sure. The high expense ratio includes an allowance for the ETF’s estimated tax liability, which it will incur in the future by not passing along the full tax liability to ETF holders. That expense is currently 0.17% of the fund’s 1.01% expense ratio, but that is likely to grow over time as the fund collects more distributions and tax liability.

AMLP is a good performer too, returning 20.2% over the 3-year lookback, 20.8% over the 5-year time frame, and 8.2% over the 10-year period.

The concentration of XLE is not ideal, but its long-term performance and low expense ratio make it the better bet for investors. However, AMLP is worth it for energy investors keen on simplifying their taxes with little performance trade-off.

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