The Vanguard Energy Index Fund ETF (VDE) and State Street’s The Energy Select Sector SPDR Fund (XLE) are two of the largest Energy sector ETFs and two of the most popular among individual investors. Many investors compare VDE vs XLE because they are so similar. The funds are quite similar in many respects, but performance deviated a bit in the “twenty teens.”
A quick reminder that this site does NOT provide investment recommendations. Fund comparisons (such as this one) are not conducted to identify the “best” fund (since that will vary from investor to investor based on investor-specific factors). Rather, these fund comparison posts are designed to identify and distinguish between the fund details that matter versus the ones that don’t.
The Short Answer
The primary difference between the funds is that XLE is a large-cap fund, while VDE includes mid-caps and small-caps.
The Longer Answer
Historical Performance: VDE vs XLE
XLE was launched back in 1998, while VDE was launched in 2004. Since the VDE’s launch, the two funds have performed somewhat similarly, with an annualized difference of .62%. The cumulative performance differential has compounded though and sits at 2.6%.
Interestingly, the funds pretty much moved in tandem until 2012 and that performance differences has compounded since then.
Portfolio Exposures: VDE vs XLE
XLE tracks the Energy Select Sector Index, which is essentially a sub-index of the S&P 500 (which is predominantly composed of large-caps). It has changed over the years, but the index that VDE currently tracks is includes more mid-caps and small-caps (even though it is also predominantly large-caps).
Geographic Exposure
Both VDE and XLE hold essentially 100% stocks, so I will not dig into country exposures or market classification here. For all intents and purposes, the two funds have identical geographic exposures.
Market Cap Exposure
As the below data illustrates, XLE primarily holds large-caps, while VDE is a bit more diversified in terms of market cap. Despite this difference, both funds are market-cap weighted and risk/return is overwhelmingly driven by the large-cap exposure.
| XLE | VDE | |
| Large Cap | 86% | 75% |
| Mid Cap | 15% | 15% |
| Small Cap | 0% | 9% |
Sector Exposure
VDE and XLE are energy ETFs and so their holdings are 100% energy stocks.
Practical Factors: VDE vs XLE
Transaction Costs
As ETFs, both XLE and VDE are free to trade on many platforms. Bid-ask spreads for both VDE and XLE are extremely low and volume is sufficient to prevent most individual investors from “moving the market.”
Expenses
The expense ratio for both XLE and VDE is .10%. At these low levels of expense ratios, small differences in expense ratios does not typically matter anyways. Something to keep in mind if one fund or the other decides to reduce fees.
Tax Efficiency & Capital Gain Distributions
Neither VDE nor XLE has ever made a capital gain distribution and I do not expect either fund to make capital gains distributions moving forward (since they are ETFs). In my opinion, these two funds are equally tax-efficient.
Options Strategies
The one factor that may sway someone towards XLE is if they are managing some type of option strategy, such as covered calls. The options market for XLE is much more active than for VDE. Of course, if someone wants to trade options without triggering tax consequences in another part of their portfolio, perhaps VDE is the better pick for the non-option holding.
Bottom Line: VDE vs XLE
VDE and XLE are fairly similar in most ways and the decision to use one versus the other depends on an investor’s preference for small-caps or large-caps. I believe investors’ time is better spent evaluating and thinking through more material decisions.
Investors looking for other energy vehicles might consider Fidelity’s energy ETF (read my post comparing FENY and VDE here) or Vanguard’s mutual fund version of VDE, VENAX.
