by Tom Taulli | March 1, 2013 6:30 am
Crude oil has been fairly weak for months, falling about 6% amid drivers such as a strengthening U.S. dollar, fears that the Fed will pull back on its easy monetary policy, and the overall fragility of the global economy.
Still, it’s hard not to like the long-term prospects for oil, as well as the broader energy sector. Oil is becoming increasingly more difficult to find, plus any turmoil in the Middle East always looms as a potential catalyst for prices.
Meanwhile, we’re seeing more advances in natural gas use, and looking even farther down the line, it’s hard not to see the eventual rise of alternative energy sources like solar and wind.
You could try to pick and choose among a number of single-stock plays, but if you just want to gain broad exposure to the energy market, you can do so through some of these mutual funds and exchange-traded funds:
Karl Bandtel — who has managed Vanguard Energy (MUTF:VGENX) for more than two decades — is a pro when it comes to investing in the energy market. The tape tells the tale, with VGENX’s average annual returns coming to 15% over the past decade, almost double the S&P 500.
Vanguard Energy focuses on large-cap operators, primarily because they have diverse businesses that can ride out the volatility in commodities prices. Top holdings are a who’s who of Big Energy, such as Exxon Mobil (NYSE:XOM), Chevron (NYSE:CVX) and BP (NYSE:BP). These companies help provide a decent 2.1% dividend yield.
Also, Bandtel takes a very buy-and-hold approach to investing, which manifests itself in a scant 24% portfolio turnover.
Naturally, as it’s part of the Vanguard family, VGENX features low costs, including no load charge and just 0.34% in expenses. It also has earned a four-star rating by Morningstar.
Another cheap, high-returning and straightforward fund is of the exchange-traded type: the Energy SPDR (NYSE:XLE).
This fund simply holds 43 oil and gas companies that are a part of the S&P 500. The top five holdings include Exxon Mobil, Chevron, Schlumberger (NYSE:SLB), Occidental Petroleum (NYSE:OXY) and ConocoPhillips (NYSE:COP).
Of course, you’ll want to closely follow each of those five stocks and how they perform, as they alone account for nearly half of the overall portfolio’s weight!
Like VGENX, XLE has earned a four-star Morningstar rating, and like VGENX, it has returned an average 15% over the past 10 years, including a current yield of roughly 1.7%. That performance also has gone mostly unchecked by expenses, which are a rock-bottom 0.18%.
Concerns about fossil fuels — both about their sustainability and their impact on the earth’s climate — has led to huge investments in alternative fuels over the years.
True, the industry has been volatile and has seen a number of players fall into bankruptcy. And many of the remaining players heavily on government subsidies, which can come and go as economies sway.
Still, the long-term prospects look bright for alternative energy. Those who think better times for alternative-energy stocks are closer rather than farther could consider an investment in the Market Vectors Global Alternative Energy ETF (NYSE:GEX).
GEX’s portfolio has 30 holdings that cover a wide range of companies, from solar power system manufacturer First Solar (NASDAQ:FSLR) to electric-car maker Tesla (NASDAQ:TSLA) to Cree (NASDAQ:CREE), which specializes in LED lighting technology.
Like other alternative energy investments, GEX has performed dismally of late; the past three years have seen an annual loss of nearly 16%. On the flip side, GEX has gotten off to hot start in 2013 with 8% gains … and again, this fund is for those with a very long-term perspective.
GEX charges 0.62% in expenses.
While most investment in physical commodities is done through futures — which can be complicated and risky — a variety of ETFs make it much more accessible to individual investors. One is the PowerShares DB Energy Fund (NYSE:DBE) ETF
The fund is based on the DBIQ Optimum Yield Energy Index Excess Return, which tracks futures in light sweet crude oil (WTI), heating oil, Brent crude oil, RBOB gasoline and natural gas, providing investors with wide exposure to a number of energy sources.
DBE, which charges 0.75% in expenses, has been fairly steady over the past three years, notching annual gains of more than 5% during the past three years. Still, when energy markets move big, DBE usually gets a nice boost in turn, like in 2009 when the fund posted a whopping 30% return.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of “How to Create the Next Facebook” and “High-Profit IPO Strategies: Finding Breakout IPOs for Investors and Traders.”Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
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