In a market dominated by headlines about artificial intelligence and technology stocks, the top-performing exchange-traded fund (ETF) from investment giant Vanguard over the last five years comes from a more traditional sector. Surprisingly, the Vanguard Energy ETF (VDE) has delivered the highest returns, outperforming all other 98 funds offered by the firm, including those focused on high-growth tech.
This unexpected result highlights the cyclical nature of markets and the importance of context when evaluating investment performance. The fund’s success story is deeply tied to the global economic recovery following the pandemic, a period that saw energy prices rebound from historic lows.
Key Takeaways
- The Vanguard Energy ETF (VDE) was the best-performing Vanguard ETF over the last five years, with an average annual return of 30.2%.
- Its performance was largely driven by a recovery from the 2020 oil price collapse during the COVID-19 pandemic.
- The ETF is heavily weighted in major oil companies like ExxonMobil, Chevron, and ConocoPhillips, known for low production costs and stable dividends.
- Despite its five-year success, the fund has been nearly flat over the last three years, while the S&P 500 has seen significant gains.
- Future performance may depend on macroeconomic shifts, such as a renewed investor focus on value and dividends over growth.
Understanding the Five-Year Surge
The Vanguard Energy ETF's remarkable performance is a lesson in market timing and perspective. Over the past five years, it has generated an average annual return of 30.2%. This figure significantly outpaces the next best performer, the Vanguard Financials ETF, which averaged a 20% annual return over the same period.
However, this growth story requires a look back to its starting point. Five years ago, in late 2020, the global economy was grappling with the COVID-19 pandemic. Widespread lockdowns caused a collapse in travel and transportation, leading to a severe drop in oil demand. In an unprecedented event in the spring of 2020, oil prices briefly turned negative as storage capacity ran out.
This historic low created a perfect setup for a dramatic rebound. As economies reopened in 2021 and 2022, demand for oil surged, pushing prices and energy company profits higher. A significant portion of the ETF's five-year gains occurred during this initial recovery phase, as the fund's value tripled from its 2020 lows.
Performance in Perspective
While the five-year return is impressive, a shorter-term view tells a different story. Over the last three years, the Vanguard Energy ETF has been relatively flat, gaining just over 3%. In contrast, the broader S&P 500 index gained approximately 80% during that same timeframe, driven largely by technology and growth stocks.
A Look Inside the Energy ETF
The Vanguard Energy ETF (VDE) offers investors a low-cost way to gain exposure to the U.S. energy market. With an expense ratio of just 0.09%, it is an efficient vehicle for investing in the sector. The fund holds shares in 111 different energy companies, but its performance is heavily influenced by a few key players.
The top three holdings are industry giants that form the backbone of the portfolio:
- ExxonMobil (XOM)
- Chevron (CVX)
- ConocoPhillips (COP)
Together, ExxonMobil and Chevron account for nearly 38% of the fund's weight. Adding ConocoPhillips brings that concentration to over 43%. This focus on large, established companies is a defining feature of the ETF.
Why These Companies Matter
These industry leaders are known for their operational efficiency and financial resilience. Both ExxonMobil and Chevron are working to lower their breakeven costs—the oil price at which they can operate profitably. Chevron's breakeven is already estimated at around $30 per barrel, one of the lowest in the industry. ExxonMobil aims to reach a similar level by 2030.
This low-cost structure allows them to remain profitable and continue paying dividends even when oil prices are low. This is a critical factor for income-focused investors.
A Focus on Dividends
The major holdings in the VDE are also dividend stalwarts. ExxonMobil has increased its dividend for 42 consecutive years, while Chevron has a 38-year streak of increases. The Vanguard Energy ETF itself has a dividend yield of 3.1%, which is substantially higher than the S&P 500's average yield of just 1.2%.
The Outlook for Energy in 2026
Looking ahead, the path for the Vanguard Energy ETF may be more challenging. Current forecasts suggest potential headwinds for oil prices. According to the Energy Information Administration's (EIA) Short-Term Energy Outlook, global oil supply is expected to outpace demand, potentially pushing inventories higher in 2026.
The EIA projects that Brent crude oil, the international benchmark, could average just $52 per barrel in 2026. Excluding the pandemic-driven anomaly of 2020, this would be the lowest average price since 2016. Lower oil prices directly impact the profitability of the companies held within the VDE.
"Weak 2026 forecasts are likely factored into investor expectations... Brent prices in the low $50s per barrel would strain margins and erode profitability for many oil and gas companies."
For the Vanguard Energy ETF to outperform the S&P 500 again in 2026, certain conditions would likely need to materialize. One scenario involves a broad market rotation where investors move away from high-valuation growth stocks and toward value and dividend-paying stocks, a trend seen in 2022. Another possibility is an unexpected geopolitical event or supply disruption that causes a sharp spike in oil prices.
Is the Energy ETF a Good Investment Now?
Despite the uncertain price outlook, the Vanguard Energy ETF holds some appeal, particularly for specific types of investors. With a price-to-earnings (P/E) ratio of 16.9, it appears relatively undervalued compared to the Vanguard S&P 500 ETF, which has a P/E ratio of 28.9.
This valuation gap, combined with its high dividend yield, makes it an attractive option for those seeking passive income or for investors who are concerned about a potential correction in growth stocks.
The fund’s concentration in high-quality companies with low production costs provides a degree of stability. These firms are structured to weather periods of lower oil prices while continuing to reward shareholders. For investors looking to diversify their portfolio and add a value-oriented, income-producing component, the Vanguard Energy ETF remains a compelling choice, even if a repeat of its recent stellar performance is not guaranteed.
