How to invest in energy
Exploring opportunities in traditional and renewable energy while balancing growth with risk
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Key takeaways
Energy powers the global economy, making it a resilient but potentially volatile sector for investors.
Investment options are broad, ranging from traditional oil and gas to rapidly expanding renewable energy and green bonds.
While energy can provide growth and diversification, investors should weigh risks like price volatility, regulation, and market shifts.
Why consider investing in the energy sector?
Energy is a diverse industry, often seen as a core sector of the global economy, by powering industries, households, transportation systems, and more.1 Due to its influential role, the energy sector offers a wide range of opportunities for investors, from traditional fossil fuels to growing renewable resources.
Let’s explore different investment options within the energy sector while outlining both the potential rewards and risks you may face to help you make a more informed decision about whether energy belongs in your portfolio.
Traditional vs. renewable energy investments
Before exploring investment options, it’s important to differentiate between traditional and renewable (green) energy, which may influence your investment options. Here’s a clear breakdown of the two:
Traditional energy investments
Traditional energy definition: Traditional energy refers to the use of fossil fuels (such as coal, oil, or natural gas) or nuclear energy for electricity generation and transportation. These energy sources are known to be finite, as the rate of consumption is much greater than the rate of formation (hundreds of millions of years).2
Traditional energy investments: Investments in companies and assets tied to fossil fuels or nuclear power.
Renewable energy investments
Renewable energy definition: Renewable energy uses natural sources like sunlight, wind, water, heat from the earth (geothermal energy), and biomass (organic matter) to produce energy. These sources are replenished at a higher rate than they are consumed and are plentifully available.3
Renewable energy investments: Investments in companies and projects focused on clean energy generation (solar, wind, hydropower, geothermal, biofuels) and supporting technologies (batteries, EVs, smart grids).
On one end, traditional fossil fuels such as oil and natural gas continue to play a critical role in meeting today’s global demand. On the other, renewable energy sources like wind, solar, and hydro are rapidly expanding as countries transition to cleaner alternatives and build out infrastructure for electrification. This creates space for investors to diversify within the sector.
Ways to invest in energy
Due to the broad nature of the energy sector, many investors consider exploring their options before making any decisions. Let's explore some different methods to invest in energy.
Individual energy stocks
Purchasing shares of individual energy companies through stocks can help you gain exposure to a specific part of the energy sector. If you’re wondering how to invest in energy stocks, some options include:
Major oil and gas companies: Large integrated oil companies often pay dividends, but stock performance may be influenced by oil prices.
Renewable energy companies: This includes businesses focusing on green energy (like solar energy companies). The shift towards clean energy and government incentives may influence company growth in this area.4
Utilities: Companies offering consumers energy (e.g., electricity) may sometimes pay dividends, which may attract income investors.
Investing in energy stocks can help you gain direct exposure in the industry, with the potential for dividends through traditional energy or growth through renewables. However, it is also important to be aware of the risk associated with stocks, as they are tied to company-specific performance and subject to risk of loss of principal.
Energy exchange-traded funds (ETFs)
Energy-focused exchange-traded funds (ETFs) are essentially bundles of different energy stocks that trade like a single stock, allowing investors to gain broad exposure across multiple energy companies at once. Investors can choose from ETFs that focus on traditional energy, those that target clean energy, or those focusing on a specific sector (e.g., solar, wind, or natural gas), depending on their preference.
Energy ETFs can be an option that offers portfolio diversification across companies, which can help reduce company-specific risk. Sector-wide risks (e.g. geopolitics) can still affect results. However, while they might help investors spread your risk a bit more than stocks, they also may offer more limited control over specific holdings.
ETFs also come with the risk of loss of principal, something to keep in mind when considering different ways to invest in energy.
Renewable energy and green bonds
For those interested in more sustainable investments, renewable energy and green bonds might be an option to consider. These fixed-income securities target and finance environmentally friendly projects. They generally have lower volatility than stocks, though credit and interest-rate risk still apply.
Green and sustainable bonds are often available through different bond funds or ETFs. However, due to the lower associated risks of bonds compared to other investment options, returns may also be lower.
Risks and considerations of energy investments
Like with most investment options, investing in the energy sector also comes with a fair share of risks and considerations. Geopolitical issues, market volatility, regulatory changes, and other environmental factors can influence performance. Some things to keep in mind include:
Price volatility: Supply and demand, geopolitical tensions, or other regulatory decisions can cause energy prices (e.g., gas, oil, electricity) to swing. This volatility can lead to a significant impact on stock values and commodity-based investments.
Regulatory and policy risk: Government policies, subsidies, and environmental regulations can help or harm certain energy sectors. For example, if stricter emission standards are implemented, this might lead to increased costs for fossil fuel companies but boost renewable options.
Geopolitical risk: Many energy resources come from politically unstable regions. Conflicts, trade disputes, or sanctions can disrupt supply and push prices up or down.5
Transition risk (traditional vs. renewable): The shift towards clean energy may lead to risks for fossil fuel investments, but renewables may also face risks from policy changes, new technologies, or financing challenges.
Market and demand shifts: Energy can be a cyclical and volatile industry. Economic slowdowns, long-term trends, and efficiency improvements may change demands of certain energy sources.
Is investing in energy right for you?
While investing in the energy sector may be seen by some as a growth and income opportunity, it’s important to consider the associated risks with this investment type to ensure it is in alignment with your investment horizon, financial goals, risk tolerance, and financial situation.
Diversification is one approach investors often take to help spread risk. Since energy investment options can be quite volatile, you may also want to consider other options to help balance your portfolio. If you are having difficulty deciding if this is the right investment option for you, you might want to consider seeking professional advice from a financial advisor to help assess your situation.
Bottom line
Energy remains an essential and dynamic sector in the global economy. From fossil fuels to renewables, the energy sector provides investors with multiple pathways to diversify portfolios. However, the right approach depends on your risk tolerance, investment goals, and time horizon.
If you’re looking for other ways to complement your investment strategy, Raisin is here to help. Raisin gives you access to a variety of savings products with competitive interest rates. Explore account types, compare rates, and sign up today to start maximizing your savings potential!
FAQs on how to invest in energy
What is the best energy ETF to invest in?
The “best” ETF depends on your individual goals. Some ETFs focus on oil and gas companies, while others target renewable energy or a mix of both, and other may avoid investing in ETFs entirely. By comparing performance history, expense ratios, and sector focus, you can get a better idea of what to choose. However, it is important to consider the potential risks of individual ETFs and that past performance does not guarantee future returns.
Is renewable energy a good long-term investment?
Renewables are widely considered a growth area due to global decarbonization efforts and rising demand for clean energy. That said, growth may come with volatility and policy-driven risks.
How risky is investing in energy stocks?
Energy stocks can be volatile, influenced by commodity prices, geopolitical issues, and regulation. Fossil fuels face long-term transition risks, while renewables depend on policy support and technological progress. Diversifying your portfolio can help manage these risks.
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The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.
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