Energy Fund Faceoff: Vanguard Energy vs Alerian MLP. Which ETF to Buy Now?

Key Points

• Alerian MLP ETF provides a significantly higher dividend yield through a concentrated portfolio of 20 midstream energy partnerships

• Vanguard Energy ETF offers a much lower expense ratio and broader exposure across 111 integrated energy companies

• Vanguard Energy ETF has delivered higher total returns over the past year but carries a higher historical maximum drawdown

Comparing Vanguard Energy ETF (NYSEMKT:VDE) and Alerian MLP ETF (NYSEMKT:AMLP) reveals a trade-off between the high-income, midstream focus of the Alerian fund and the low-cost, broad-market energy approach of the Vanguard fund.

Energy sector investing offers multiple pathways, from high-yielding pipelines to broad oil and gas giants. While both the Vanguard fund and the Alerian fund target the energy sector, they provide vastly different exposures. This comparison analyzes how their costs, yields, and portfolios could impact a long-term investment strategy.

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 June 30.

The cost difference is stark: the Vanguard fund charges a slim 0.09% expense ratio, while the Alerian fund charges 1.01%. However, income seekers may prefer the Alerian fund for its substantial 8% yield, which significantly exceeds the 2.7% payout offered by its peer.

Performance & risk comparison

What’s inside

The Vanguard Energy ETFtracks a broad index of 111 stocks, providing deep exposure across the integrated energy landscape. Its portfolio is concentrated in energy at 99.5%, with largest positions including Exxon Mobil Corp. (NYSE:XOM) at 21.9%, Chevron Corp. (NYSE:CVX) at 14.1%, and ConocoPhillips (NYSE:COP) at 5.8%. The fund was launched in 2004. Vanguard Energy ETF has paid $4.03 per share over the trailing 12 months, which on its recent $150.13 share price works out to a 2.70% yield.

The Alerian MLP ETF is more concentrated, holding only 20 positions. It focuses exclusively on midstream infrastructure, with a sector breakdown of 98% energy and 2% utilities. Its top holdings include Plains All American Pipeline LP (NASDAQ:PAA)at13.7%, Western Midstream Partners LP (NYSE:WES) at 13.6%, and Sunoco LP (NYSE:SUN) at 13.4. The fund was launched in 2010. Alerian MLP ETF has paid $4.02 per share over the trailing 12 months, which, on its recent $51.85 share price, works out to an 8% yield.

Which fund is the better buy?

The Alerian MLP ETF, AMLP, comes with a much higher expense ratio that its Vanguard competitor, 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 and sending shareholders a single 1099 for tax filing. 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 because it will not pass 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.

The Vanguard Energy ETF, VDE, invests in straightforward equities rather than MLPs, so it’s accessing a different portion of the energy business, mainly producers and retailers, while MLPs tend to be midstream businesses that transport oil and gas.

The Vanguard fund has had a better year, reflecting the greater volatility present in oil and gas producers and retailers, who respond much more readily to commodity price changes. Midstream energy businesses are more insulated from oil and gas price shocks because the fuels need to be transported regardless of price. But over time, the Alerian fund shows its chops. AMLP has returned 20.2%, 20.8%, and 8.2% over the 3-year, 5-year, and 10-year periods. VDE has returned 13.4%, 18.7%, and 8.4% over the 3-, 5-, and 10-year lookbacks, respectively.

The 1-year and 10-year returns of VDE beat AMLP, but Alerian appears to be more consistent, which makes sense given the payouts from MLPs. Still, AMLP’s high expense ratio suggests long-term returns will suffer compared to the low-cost Vanguard offering. Investors have two good choices here: income-minded investors seeking simplicity are wise to consider AMLP, but VDE gets the nod.

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

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Brendan Coffey has positions in Vanguard World Fund – Vanguard Energy ETF. The Motley Fool has positions in and recommends Chevron. The Motley Fool recommends ConocoPhillips. The Motley Fool has a disclosure policy.