In recent years, the energy sector has been through major upheavals attributable to a series of unwanted episodes in the global economy. Starting from the oil spill in the Gulf of Mexico to the broader European debt crisis, these events have collectively resulted in a huge level of volatility in the energy sector (Two Energy ETFs Holding Their Ground).

In fact, 2012 turned out to be a broad downturn for energy-based ETFs due to a sluggish economy which dragged down the oil market. For most of fiscal 2012, energy ETFs were in the red with some recovery witnessed only in the latter part of the year. A rebound in energy prices in the second half gave some life to energy ETFs, although this was hardly enough to balance out the earlier losses.

The recovery nonetheless continued into 2013 with the sector posting huge gains to date. This may be due to mounting oil prices which have reached a level of $98 a barrel, the highest since September last year.

A remarkable rise in oil production in the U.S. once again lured the global energy firms to the U.S. market. If the current trend continues the U.S. may become the world’s biggest producer of oil five years down the line.

In fact, by the end of 2035, the U.S. is poised to be “energy independent” and start exporting natural gas by the end of this decade (3 Energy ETFs for America's Production Boom).

The current boom in oil production shows little signs of waning which should strengthen energy ETFs going forward.

Strong earnings numbers from energy companies should also be credited for the recent surge in energy funds. Many energy companies are expected to post strong gains in the quarter.

In the light of the above discussion, the U.S. Energy sector appears to be another lucrative opportunity to invest in 2013. It is a sector with strong fundamentals and low valuations (Top 5 Best Performing Energy ETFs).

If the market continues with its recent rally, the energy sector is certain to be a beneficiary. And with the boost in oil production capacity by most drillers, the U.S. will once again become a leader in energy development. To play this strength in the energy sector, in basket form, we have briefly highlighted a few of the ETFs tracking the industry which could make for interesting picks if current trends hold:

Energy Select Sector SPDR Fund (XLE)

XLE is one of the most popular ways to tap into the energy sector. Given the current boom in oil prices and the bullish trend in oil production in the U.S., this ETF represents an effective way to capitalize on the strength as oil companies play a substantial role in the performance of the fund (5 Sector ETFs Surging to Start 2013).

Oil Gas & Consumable Fuel companies form about 80% of the ETF portfolio while the rest goes to energy equipment & services. The high level of concentration in the oil sector companies has been a boon for the fund at this point of time.

The fund since the start of the year has posted gains of 5.9%. This is a huge gain when compared with the overall 2012 gain of 5.21%.

XLE is home to 45 stocks in which it invests an asset base of $7.7 billion. The fund appears to be highly concentrated as it is 60.9% dependent on the top ten holdings for its performance. In fact, two oil giants Exxon and Chevron take away nearly 32% of the asset base. The fund charges a fee of 18 basis points annually.

iShares U.S. Oil & Gas Exploration & Production ETF (IEO)

For a pure play in oil production and exploration companies, IEO could be a solid choice. The fund is relatively popular with its 60 security basket, having amassed over $300 million in AUM.

Company-specific risk appears to be relatively high in the ETF as indicated by a concentration level of 64.5% in the top ten holdings. In fact, the top most holding Occidental Petroleum Corp plays a very dominant role in the fund holding an asset base of 13.9%.

The fund started 2013 on a strong note as indicated by its year-to-date return of 8.8% while in 2012 it delivered a return of just 4.37%. The fund charges a fee of 46 basis points annually.

Market Vectors Oil Services ETF (OIH)

OIH appears to be quite popular among investors as revealed by its trading volume of more than eight million shares a day. The fund since its inception in Dec 2011 has been able to build an asset base of $1,508.9 million (Oil Bull Market Is No Place For MLP ETF Investors).

The fund appears to invest this in 26 securities which are mostly large cap companies. However, the product has not been able to minimize company-specific risk as 71.2% of the asset base goes towards the top ten holdings.

The fund has assigned heavy weighting to the top two holdings namely Schlumberger Ltd and Halliburton Co. The allocation to the two companies stand at 30.4%.

The performance of the fund after the recent rise in oil production and surge in oil prices has been striking. The fund delivered a return of 9.4% in the year to date period, while charging a low 35 basis points in fees annually.

iShares U.S. Energy ETF (IYE)

IYE offers a broader exposure to oil and gas companies in which Oil & Gas Producers form 75% of the fund while Oil Equipment, Services & Distribution companies take 25% of the asset base.

The fund is home to 88 securities in which it invests an asset base of $1.2 billion. The fund is heavily invested in the top ten holdings as revealed by its concentration level—in the top ten-- of 63.6% (Three ETFs With Incredible Diversification).

Among individual holdings, Exxon, Chevron and Schlumberger form the top line of the fund. All the three companies get a share of 43.5% in total in the fund. The fund charges a fee of 46 basis points and year-to-date, IYE has delivered a return of 5.6%.

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ISHARS-DJ O&G (IEO): ETF Research Reports
ISHARS-DJ EGY (IYE): ETF Research Reports
MKT VEC-OIL SVC (OIH): ETF Research Reports
SPDR-EGY SELS (XLE): ETF Research Reports
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