Quick Answer
- USO (0.60%) holds oil futures contracts and tracks crude oil prices directly, but can lag the spot price over long periods due to contango, the cost of rolling futures contracts forward.
- XLE (0.09%) and VDE (0.10%) hold oil and gas companies, not oil itself. XLE is roughly 40% ExxonMobil and Chevron, so it moves with crude but also with company earnings and dividends.
- OIH (oil services) and XOP (equal-weighted exploration and production) are higher-beta subsectors that amplify oil price swings more than XLE does.
- AMLP (7.0% yield) holds pipeline master limited partnerships and issues a standard 1099, not the K-1 that comes with owning individual MLP stocks directly.
- Energy is one of the most cyclical sectors in the market: the worst-performing S&P sector in 2020, the best in 2021 and 2022. Position size accordingly.
USO Doesn't Hold a Single Barrel of Oil
USO (United States Oil Fund) is the fund most people picture when they think "oil ETF." It is not a warehouse of crude. It holds futures contracts, agreements to buy oil at a set price on a future date, and rolls them forward into new contracts before each one expires. At a 0.60% expense ratio, this gets you the most direct exposure to the price of crude oil available in ETF form.
The catch is structural, not incidental. When futures prices for later-dated contracts run higher than the current month's price, a condition called contango, rolling a contract forward means selling low and buying high every single month. That roll cost compounds. Over a period where oil's actual spot price is flat, USO can still lose money purely from the mechanics of the roll. Over years, this has caused USO's total return to diverge meaningfully from the change in oil's spot price, even when they move the same direction.
USO does not need oil to fall for you to lose money holding it. If the futures curve is in contango long enough, the fund can bleed value even while oil prices sit still.
UNG (United States Natural Gas Fund) is USO's natural-gas twin, built the same way with the same contango exposure, at a much steeper 1.25% expense ratio. Natural gas futures are also more volatile than oil futures, driven by weather, storage levels, and LNG export demand, which makes UNG one of the more punishing funds to hold through a long stretch.
XLE Is a Bet on Companies, Not on Crude Directly
XLE (Energy Select Sector SPDR) holds 23 oil and gas companies at a 0.09% expense ratio, and roughly 40% of the fund sits in just two names: ExxonMobil and Chevron. This is an equity fund. It moves with the price of oil because oil producers' profits move with the price of oil, but it also moves with earnings reports, dividend policy, and how much each company spends drilling new wells.
VDE (Vanguard Energy) covers similar ground at 0.10%, with 115 holdings that reach further into mid-cap energy names than XLE's more concentrated 23. The two track each other closely; VDE is simply broader. FENY (Fidelity MSCI Energy) undercuts both at 0.084% with 120 holdings and is commission-free at Fidelity, making it the cheapest broad energy-sector option of the three. IYE (iShares US Energy) covers similar territory at 0.40%, four times XLE's fee for largely equivalent exposure, and is hard to justify unless a specific brokerage relationship requires it.
USO is a claim on the price of oil itself. XLE is a claim on the profits oil companies make selling it. The two are correlated, not identical, and the gap between them widens exactly when it matters most: during sustained moves in either direction.
OIH and XOP Split the Sector Two More Ways
OIH (VanEck Oil Services) narrows the equity bet further, holding 25 companies that service oil producers: drilling contractors, equipment makers, maintenance providers, rather than the producers themselves. At 0.35%, OIH amplifies oil price moves in both directions more than XLE does, since service companies' order books expand and contract faster than integrated majors' overall earnings.
XOP (SPDR S&P Oil & Gas Exploration & Production) takes a different structural approach: it is equal-weighted across roughly 50 exploration and production companies at 0.35%, rather than weighted by market cap the way XLE is. That equal weighting removes the stabilizing effect of giant integrated majors like Exxon, so XOP tends to swing harder than XLE in both directions.
AMLP and the Tax Question Most Investors Don't Expect
AMLP (Alerian MLP Infrastructure) holds 25 master limited partnerships, mostly pipeline companies that earn toll-road-like fees moving oil and gas rather than betting on its price. At 0.85%, the fee is high for the category, but the yield is the draw: roughly 7.0%, well above every other fund in this guide.
The detail that catches people off guard: individual MLP stocks held directly typically issue a K-1 tax form instead of a standard 1099, which is more complex to file and can trigger unrelated business taxable income (UBTI) concerns if held inside an IRA. AMLP sidesteps this by wrapping the partnerships inside a fund structured as a C-corporation, so fund investors receive a standard 1099 instead. That structural choice is a meaningful part of what you're paying the 0.85% fee for.
Because AMLP's C-corporation wrapper pays corporate-level tax on the fund's gains before distributing them, part of the fund's 0.85% expense ratio reflects real tax drag, not just management overhead. This is the trade-off for avoiding K-1 paperwork: simpler taxes, a somewhat higher ongoing cost.
The Full Lineup, Compared
| Fund | Expense Ratio | Structure | Yield | Notes |
|---|---|---|---|---|
| XLE | 0.09% | Equity, 23 holdings | 3.5% | ~40% ExxonMobil + Chevron. The default large-cap energy fund. |
| VDE | 0.10% | Equity, 115 holdings | 3.0% | Broader than XLE, reaches into mid-caps. |
| FENY | 0.084% | Equity, 120 holdings | 3.2% | Cheapest broad energy fund. Commission-free at Fidelity. |
| IYE | 0.40% | Equity, 50 holdings | 3.0% | Four times XLE's fee for similar exposure. |
| XOP | 0.35% | Equity, 50 holdings | 3.5% | Equal-weighted E&P. More volatile than XLE. |
| OIH | 0.35% | Equity, 25 holdings | 2.5% | Oil services, not producers. Amplifies oil-price moves. |
| AMLP | 0.85% | MLP wrapper, 25 holdings | 7.0% | Pipelines. Issues a 1099, not a K-1. |
| USO | 0.60% | Futures, 5 contracts | 0% | Tracks crude directly. Contango risk over time. |
| UNG | 1.25% | Futures, 5 contracts | 0% | Natural gas. Same contango issue as USO, more volatile. |
Expense ratios, yields, and holdings counts approximate and change over time. Past performance does not guarantee future results.
Energy Is a Boom-Bust Sector, and the Numbers Show It
Every fund in this guide sits inside one of the most cyclical sectors in the market. Energy was the worst-performing S&P 500 sector in 2020, when demand collapsed and oil briefly traded at a negative price for the first time in history. It was the best-performing S&P 500 sector in both 2021 and 2022, as demand recovered and Russia's invasion of Ukraine disrupted global energy supply. Few sectors move that far in either direction within a two-year span.
That volatility is not a flaw to be avoided so much as the entire point of holding the sector at all: energy has historically moved differently from tech and growth stocks, which is part of why some investors use it as a diversifier or inflation hedge. But it means an energy position sized for a "boring dividend sector" can swing far harder than that label suggests. The sector ETF guide covers how to size any single-sector tilt without it dominating a portfolio.
Common questions
It depends whether you want oil the commodity or oil companies. USO (0.60%) is the most direct commodity exposure, holding oil futures contracts, but it can lag the spot price of oil significantly over long holding periods due to contango. XLE (0.09%) holds oil and gas companies like ExxonMobil and Chevron and is far cheaper, but it is an equity fund, not a commodity fund, so it moves with company earnings and capital spending as well as crude prices. Most long-term investors are better served by an equity energy fund like XLE or FENY than a futures-based fund like USO. Past performance does not guarantee future results.
USO holds oil futures contracts and tracks the price of crude oil directly, at a 0.60% expense ratio. XLE holds shares of oil and gas companies, roughly 40% concentrated in ExxonMobil and Chevron, at a 0.09% expense ratio. USO is exposed to contango, a structural drag from rolling futures contracts that can cause it to underperform the actual price of oil over time. XLE is exposed to company-specific factors like earnings, dividends, and capital spending decisions in addition to the oil price. They correlate with each other but are not interchangeable.
USO does not hold physical oil. It holds oil futures contracts, which expire and must be replaced (rolled) into new contracts before expiration. When futures prices for later months are higher than the current month, a condition called contango, the fund sells cheaper expiring contracts and buys more expensive future ones, losing a little value on every roll. Over years, this roll cost can cause USO's return to diverge meaningfully from the actual change in oil's spot price, even when the direction is the same.
AMLP holds master limited partnerships, pipeline and infrastructure companies structured as partnerships rather than corporations. Because AMLP itself is structured as a C-corporation wrapping those partnerships, it issues a standard 1099 to fund investors rather than passing through individual K-1 forms, which is one of the reasons investors choose an MLP ETF over buying individual pipeline partnerships directly. Individual MLP stocks held outside a fund typically do issue K-1 forms, which are more complex to file and can trigger unrelated business taxable income (UBTI) concerns inside an IRA. This is general education, not personalized tax advice.
One ETF concept a week. Free, forever.
Plain-English ETF breakdowns like this one, straight to your inbox. No jargon, no stock tips.
Reviewed by a CFA® charterholder · No spam · Unsubscribe anytime