5 Funds to Play the Crude Oil Boom


With civil war breaking out in Libya, crude oil prices have spiked to a 29-month high.  It looks like much of the supplies are off the market.  And that has made investors nervous, bidding up energy stocks, crude oil ETFs and related mutual fund investments.

Of course, there are concerns that other OPEC nations will experience unrest, with the most worrisome being Saudi Arabia.  If its supplies got disrupted, there would likely be an “oil shock.” And the bump in exchange traded funds and publicly-traded energy stocks will only be the beginning.

Besides these factors, we face other long-term trends that should keep oil prices rising.  One involves the “peak theory,” which predicts that it will get tougher to extract oil from existing sources.   Another factor is  that it’s getting harder to find new oil deposits.  And even when discovered, they are usually in deep water or in politically unstable regions.

While the future looks scary, it can mean opportunity for investors.  Here are some ETFs and mutual funds that should benefit from an oil surge:

Vanguard Energy (VGENX)

Oil & Gas PumpjackVanguard Energy Mutual Fund (MUTF: VGENX), which has $14.6 billion in assets, has posted juicy gain for its investors.  The 10-year annual average return is 15.52%. As should be no surprise, Vanguard Energy is a low cost operation.  The expense ratio is only 0.38% and the turnover is a mere 27%.

To deal with the volatility in the energy sector, the fund focuses on larger companies and tries to find value plays.  There is also a blend of integrated oil companies and service operators.  The top holdings include ExxonMobil (NYSE: XOM), Occidental Petroleum (NYSE: OXY), Chevron (NYSE: CVX) and Royal Dutch Shell (NYSE: RDS.A).

Columbia Energy & Natural Resources (EENAX)

The Columbia Energy & Natural Resources (MUTF: EENAX) mutual fund has clocked a nice 29.44% return for the past year.  In fact, the annual average return has been 7.98% for the last three years.  This is a good performance in light of the recession as well as the horrendous BP (NYSE: BP) oil spill.

But it helps that the fund invests in a broad range of energy companies.  These include exploration operators, integrated oil companies, pipelines, utilities and even materials firms.  In other words, there is a fair amount of non-oil commodity exposure.

PowerShares DB Oil (DBO)

PowerShares DB Oil ETF (NYSE: DBO) is an exchange traded fund that purchases futures on light sweet crude oil.  Essentially, these allow investors to buy or sell a commodity by taking delivery at a later date (say three to six months).

However, a futures-based ETF is subject to “roll risk.”  This means that if a commodity market is in contango – in which the current price is lower than the futures prices – it gets more expensive to buy new contracts.  The result can be a fall in the ETF’s value even if the commodity price is increasing!

But, in the case of the PowerShares DB Oil, it uses a sophisticated set of algorithms to minimize the roll risk.  All in all, it has worked – and makes it possible for investors to reliably track the price of crude oil.

Energy Select Sector SPDR (XLE)

While a futures-backed ETF generally tracks the price of oil, some investors want even more action.  That is, they look to invest in an index of oil companies – which can easily generate higher returns (or lower returns if the price of oil falls).

One popular choice is the Energy Select Sector SPDR (NYSE: XLE).  It has exposure to oil and natural gas.

Although, there is company concentration in the portfolio.  Consider that 43.66% of the assets are in ExxonMobil, Chevron, Schlumberger (NYSE: SLB) and ConocoPhillips (NYSE: COP).  Because of this, the fund can be quite volatile.

Market Vectors Glb Alternatve Energy ETF (GEX)

ETFs to Buy - TAN

If oil prices continue their upward drive, there will definitely be more interest in alternative fuels.  Governments and businesses will want more affordable options – as well as a source of energy that comes from more stable areas.

And yes, there are a variety of ETFs that focus on alternative energy.  One example is the Market Vectors Global Alternative Energy ETF (NYSE: GEX).  It is based on an index that has exposure to companies with alternative energy sources, environmental technologies and other innovations.  The top holdings include First Solar (NASDAQ: FSLR), Vestas Wind Systems (PINK: VWDRY), Cree (NASDAQ: CREE) and Enel Green Power.

Tom Taulli is the author of various books. They include Artificial Intelligence Basics and the Robotic Process Automation Handbook. His upcoming book is called Generative AI: How ChatGPT and other AI Tools Will Revolutionize Business.

Article printed from InvestorPlace Media, https://investorplace.com/2011/03/energy-sector-oil-stocks-etf-funds/.

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