The world is making rapid advances in energy efficiency, but the reality is, humanity also continues to demand even more power to function. That simple driver is what will continue to propel energy stocks over the long-term.
However, big fluctuations in oil prices over the past few years, as well as a collapse in coal and swings in natural gas, has scared many investors off the trail.
The solution to risk-averse investors who still should absolutely be exposed to the energy sector? Mutual funds.
Energy-focused mutual funds provide diversification, which is important during the worst of times when a couple of individual firms fall on desperate times. Even if one of the stocks in a mutual fund’s portfolio goes to zero overnight, the overall effect on the fund will be far more muted than for anyone holding that stock outright.
Moreover, the energy sector is one area of the market where active management can really make a difference. The sector is difficult to track and analyze and … well, are you familiar with “spud to completion” or “wellbore efficiency ratios”? Most of us aren’t, but energy mutual fund managers are, and that counts for something.
Energy stocks belong in every portfolio, and mutual funds are among the best ways to get that fix. That said, today we’ll look at seven of the best mutual funds to buy for differing types of exposure to the energy space.
Energy Mutual Funds to Buy: Vanguard Energy Fund (VGELX)
Expenses: 0.37%
Load: None
We’ll start with one of the broadest and cheapest ways to invest in energy.
Mutual fund and ETF giant Vanguard is known for its passive index funds, but it also boasts great actively managed offerings such as the Vanguard Energy Fund (MUTF:VGELX).
VGELX is run by the superstars at Wellington Management, with the goal of long-term capital management. To achieve this, they focus on a diversified portfolio of large- and mid-cap energy stocks.
The mutual fund’s 137 holdings includes the usual suspects — Exxon Mobil Corporation (NYSE:XOM) and Chevron Corporation (NYSE:CVX) — but tries to be broadly representative of the energy sector, so it includes some storage, equipment and refining plays as well.
The approach, combined with low expenses, has created a longtime winner for investors. VGELX has produced an average 10.6% annual return since inception in May 1984.
Energy Mutual Funds to Buy: Hennessy Gas Utility Index Fund (GASFX)
Expenses: 1.01%
Load: None
The Hennessy Gas Utility Index Fund (MUTF:GASFX), despite its name, is more than just utilities that help us keep our homes heated and water flowing. It’s a play on our energy independence.
GASFX tracks all the member energy stocks in American Gas Association. While that does feature some traditional gas utilities, the bulk of the fund’s holdings are more focused on the delivery of natural gas (i.e., midstream plays). Stalwarts such as Kinder Morgan Inc (NYSE:KMI) and Enbridge Inc (NYSE:ENB) are among GASFX’s largest holdings.
America’s increased shale drilling has driven up demand for new infrastructure. That’s putting a lot of profits back into the pockets of the pipeline players. At the same time, many traditional natural gas utilities — like GASFX holding Dominion Resources (NYSE:D) — have spun off their midstream assets into tax-advantaged master limited partnerships (MLPs) and expanded their logistics assets. This will continue to fuel the fund’s performance and a modest dividend of more than 2%.
Since inception in 1989, GASFX has returned 9.95% annually on average.
Energy Mutual Funds to Buy: Rydex Energy Services (RYVIX)
Expenses: 1.35%
Load: None
Drilling for oil these days isn’t as easy as Jed Clampett made it seem. It takes plenty of high-technology and specialized equipment. And when times are good, that high-tech equipment and knowledge that goes along with it can get pretty expensive.
That makes the oil services subsector something of a leveraged play on crude oil prices.
Rydex Energy Services (MUTF:RYVIX) is one of just a few mutual funds that focus on the oil services industry. But what I like most about RYVIX is how it provides that exposure.
Unlike many sector funds that use traditional market cap-weighting, Rydex uses a modified approach in which small- and large-cap stocks basically get equal billing. This prevents domination by a few large companies and allows the growth of smaller firms to actually come through in the fund’s performance.
The unfortunate thing is that RYVIX looks awful over most major time frames simply because of the huge drop in these stocks over the past couple years. But when the going is good, this Rydex mutual fund is excellent, with the fund more than tripling between 2009 and 2014.
If you think energy is going up, RYVIX is one of the most potent plays you can make.
Energy Mutual Funds to Buy: BP Capital TwinLine Energy Fund (BPEAX)
Expenses: 1.89%
Load: 5.75%
Some investors are synonymous with certain asset classes and stock sectors. Think Bill Gross (bonds), Sam Zell (real estate) and Warren Buffett (value).
Well, when it comes to energy stocks, T. Boone Pickens is the original oil man. His investment acumen in the sector is unmatched, and he has guided his BP Capital hedge fund to excellent returns over its history.
That legacy lives on via the BP Capital TwinLine Energy Fund (MUTF:BPEAX), which is run similarly to Pickens’ original hedge fund.
The BPEAX will own stocks and debt securities of U.S. energy companies and companies that will benefit from global energy market dynamics. That means energy producers, but also logistics firms and end-users as well. Thus, while the fund holds companies you’d expect, such as Kinder Morgan and Baker Hughes Incorporated (NYSE:BHI), it also holds a few surprising names such as Goodyear Tire & Rubber Co (NASDAQ:GT).
The unorthodox approach has powered some solid performance, including a 33% surge over the past year that has doubled the S&P 500. The fund has also beaten the S&P 500 Energy Index since 2013 inception.
Energy Mutual Funds to Buy: Integrity Viking Williston Basin/Mid-North America Stock Fund (ICPAX)
Expenses: 1.47%
Load: 5%
Of course, there’s specialized, and then there’s specialized.
The Integrity Viking Williston Basin/Mid-North America Stock Fund (MUTF:ICPAX) is the latter.
ICPAX focuses on energy stocks that are drilling and otherwise exploiting the Bakken shale, one of North America’s shining energy stars. The Bakken and greater Williston Basin — which covers a number of middle-America states, from Arkansas to North Dakota, as well as Canadian provinces including Alberta and Manitoba — is low-cost but high-production. And it continues to be a hotbed of activity.
ICPAX taps into exploration and production firms such as Continental Resources, Inc. (NYSE:CLR) who call it home. But the fund isn’t just about production midstream firms — services stocks and even frack sand producers like U.S. Silica Holdings Inc (NASDAQ:SLCA) get the nod. And while the fund is Bakken-focused, many of the fund’s holdings get their revenues from several areas.
Integrity Viking’s fund doesn’t have a big name, but it is a five-time Lipper award winner and has managed to beat the S&P 1500 Energy index over the last decade.
This is a funky offering, but it’s also one of the best mutual funds in the energy space.
Energy Mutual Funds to Buy: Oppenheimer SteelPath MLP Select 40 Fund (MLPFX)
Expenses: 1.12%
Load: 5.75%
High-conviction funds — those with just a handful of stocks — are some of the real shining stars in the dull mutual fund sector. So when you add a dash of high return and dividend potential from the MLP category, you have a recipe for success.
That success is spelled MLPFX, as in the SteelPath MLP Select 40 Fund (MUTF:MLPFX).
MLPFX only holds midstream MLPs, whether they’re pipeline, gathering or processing firms. These are the boring toll-takers of the energy roads, but as toll-takers, these MLPs pay some pretty decent dividends. This fund doles out 3% in annual income, delivered monthly — not common among mutual funds.
The combination of MLPFX’s small number of holdings and high dividends has provided great overall total returns. Since 2012, the fund is up a cumulative 32%.
The only drawback is a high sales load and expense ratio, but depending on how much you invest and other considerations, those sales loads can be reduced.
Energy Mutual Funds to Buy: Guinness Atkinson Alternative Energy (GAAEX)
Expenses: 1.99%
Load: None
Not all energy stocks are the oily kind. Some catch a breeze or some rays. And that’s where the Guinness Atkinson Alternative Energy (MUTF:GAAEX) comes in.
As the name implies, Guinness Atkinson Alternative Energy bets on renewable and alternative energy sources. This includes solar, wind, hydroelectric, tidal wave, geothermal, biomass and biofuel energy. The mutual fund is global in focus and will only invest in stocks that derive at least 50% their revenues from renewables or energy efficiency.
GAAEX uses a four-pronged approach to stock selection that includes screening for valuation, quality, sentiment and momentum factors. This essentially makes it a smart-beta fund.
But that hasn’t helped on the returns front.
GAAEX has lost nearly 14% annually over the past 10 years, though other time periods aren’t as gaudy. In fact, the fund is actually up a few percent for the year-to-date. The problem is that alternative energy is a very, very long-term story, and until the tide shifts, Guinness Atkinson’s fund can only do so much. But those who are bullish on the space won’t find many better options than GAAEX.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.
