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We are only a few weeks into the new year, but one sector is separating itself from the pack. That sector is energy, which is up 9.7% year to date compared to just a 2% return for the S&P 500 at the time of this writing.

The Vanguard Energy ETF (NYSEMKT: VDE) mirrors the sector's performance. So far this year, it is the best-performing exchange-traded fund (ETF) offered by investment management firm Vanguard. And with a 3.2% yield and a mere 0.1% expense ratio, it offers an inexpensive way to generate passive income.

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Here's why the ETF is worth buying now and why the energy sector may appeal to value and income investors.

Rebounding off a down year

In 2024, the energy sector produced a total return (including dividends) of 5.7% compared to 25% for the S&P 500. 2023 was even worse, with a -0.6% total return for the energy sector compared to a 26.3% total return for the S&P 500. But in general, the sector produced solid earnings during that period, making it a good value heading into the new year.

The energy sector may not benefit as much from prevailing market themes like artificial intelligence, robotics, or cloud computing, but it does include a variety of quality dividend stocks with inexpensive valuations.

Here's a look at the 10 highest-weighted companies in the Vanguard Energy ETF, which comprise 62.8% of the fund. As you can see in the table, many of these companies have inexpensive forward price-to-earnings (P/E) ratios and sizable dividend yields.

Data sources: Vanguard, YCharts.

Many energy companies choose to pass along a portion of profits to shareholders through dividends. Dividends provide a worthwhile incentive to hold energy stocks through industry cycles. And history shows the sector's performance can be unpredictable in the near term, especially when oil prices swing wildly in either direction.

Demand for U.S. oil and gas has a long-term future

Arguably, the two best reasons why the energy sector is inexpensive are that earnings can be volatile and the future of oil and gas is uncertain, given the push toward cleaner alternatives. But there are reasons to believe both of these factors are overblown.

Many oil and gas companies used the period of outsize earnings from 2021 and 2022 to pay down debt and improve their balance sheets. Over the last couple of years, a wave of consolidation has swept the industry, leading to efficiency improvements. Artificial intelligence is energy-intensive, providing a potential boon for the midstream industry. And the growing export of U.S. natural gas through onshore pipelines to Mexico and as liquefied natural gas to buyers overseas creates more demand for pipelines and energy infrastructure assets.

Oil and gas is a vital component of energy security. On Jan. 10, the U.S. imposed sanctions on Russia's energy sector, making U.S. production paramount for global economic growth. In sum, the quality of the U.S. oil and gas industry has improved. Oil and gas can still play a crucial role in the global energy mix even as the adoption of renewable energy and low carbon fuels increases.

A plug-and-play investment vehicle for passive investors

The Vanguard Energy ETF is a simple, low-cost way to invest in U.S. energy stocks. Its concentration in names like ExxonMobil and Chevron is a good thing because these companies have multi-decade track records of increasing their dividends and impeccable balance sheets.

The fund provides exposure to integrated majors, exploration and production companies, pipeline and infrastructure companies, refining and marketing companies, and oilfield services companies. All told, the ETF is a great way to put money to work in a value- and income-oriented stock market sector.

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Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Cheniere Energy, Chevron, EOG Resources, and Kinder Morgan. The Motley Fool recommends Oneok. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.