Oil prices have been cut in half in six months, hitting a large swath of energy stocks in the process. But where there’s pain, there’s usually opportunity, making now a good time to take a close look at mutual funds that offer exposure to energy stocks.
Picking the best individual energy stocks right now might be just as hard (and arguably just as foolish) as trying to call a bottom in crude oil. How long will Saudi Arabia continue its current production levels, in the face of lower demand, to push down oil prices and squeeze out competition? Is the $50 per barrel range a good target or might it be $40, or even lower?
You don’t know. I don’t know. So don’t play a guessing game.
Instead, you can play this international oil standoff the smart way by avoiding the temptation of trying to pick specific energy stocks off the bottom, and instead just buying into a diversified mutual fund to ride the sector back up. And if prices keep falling, you can keep dollar-cost averaging down for what eventually will become one of the best long plays in recent memory.
Here are three of the best mutual funds to buy if you want to play a long-term bounce in energy.
Best Mutual Funds for Energy Stocks: Vanguard Energy (VGENX)
Expense Ratio: 0.38% (or $38 annually for every $10,000 invested)
The energy stocks that are most vulnerable to falling oil prices typically are the smaller ones. Thus, you may want to consider an sector mutual fund, such as Vanguard Energy Fund Investor Shares (VGENX), that focuses on large-cap energy stocks.
The Vanguard Energy portfolio consists primarily of large growth and large value energy stocks, with nearly three-fourths of the regional exposure in North America. Top holdings include rock-solid energy blue chips such as Exxon Mobil Corporation (XOM) and Chevron Corporation (CVX).
VGENX’s performance ranks in the top third of the equity energy fund category for the tumultuous three-month period behind us. And as far as long-term performance is concerned, Vanguard Energy’s 10- and 15-year returns rank in the top quartile.
Investors wanting to buy into energy stocks will find that Vanguard Energy is among the best mutual funds, offering long-term prospects without excessive short risk — all for low expenses and a small minimum initial purchase of $3,000.
Best Mutual Funds for Energy Stocks: Fidelity Select Natural Gas Portfolio (FSNGX)
Expense Ratio: 0.84%
Another low-cost, diversified choice for buying into energy stocks is Fidelity Select Natural Gas Portfolio (FSNGX).
Along with crude oil, natural gas prices have fallen into the gutter. Thus, FSNGX — which invests primarily in energy stocks that produce, transmit or distribute natural gas, or that provide services to companies involved in natural gas — is one of the most natural ways to try to play a rebound in this particular energy arena.
Because of the natural gas focus, FSNGX is missing many of the bigger names held by funds that focus heavily on North American energy, but you still will see some prominent companies like Devon Energy Corp (DVN), which are mixed in with midcap companies, as well as utilities such as NiSource Inc. (NI).
Since taking the helm of FSNGX in 2012, manager Ted Davis, along with the stellar-as-usual Fidelity analyst support, has put up good performance numbers compared to the average equity energy sector fund. The three-year annualized return puts Fidelity Select Natural Gas into the top third among category peers.
Meanwhile, FSNGX’s expenses are below average, and the fund is very accessible, requiring just $2,500 for a minimum initial investment.
Best Mutual Funds for Energy Stocks: ProFunds Oil Equipment Service & Distribution Fund Investor Class (OEPIX)
Expense Ratio: 1.73%
If you feel a bottom for oil is near and you are willing to take on more volatility and risk for the prospects of higher returns as oil recovers, ProFunds Oil Equipment Service & Distribution Fund Investor Class (OEPIX) may be the mutual fund for you.
ProFunds’ mutual funds are not for the risk-averse investor, to say the least. Many ProFunds portfolios routinely employ leveraged investment techniques that can magnify both gains and losses, and result in greater fluctuations in value than the respective benchmark. According to ProFunds, each geared (leveraged or inverse) ProFund seeks a return that is a multiple (e.g., 2x, -1x) of the return of an index or other benchmark (target) for a single day.
OEPIX, for instance, seeks daily investment results, before fees and expenses, that are 1.5 times the return of the Dow Jones U.S. Oil Equipment, Services & Distribution Index, meaning the fund can enhance your gains — but also accelerate your losses. The fund holds 40 energy stocks and is very top-heavy, with its 10 largest holdings representing more than 50% of the total portfolio. Schlumberger Limited (SLB) and Halliburton Company (HAL) alone represent 36% of the OEPIX’s holdings.
The fund’s lack of truly broad diversification and the nature of leveraged funds do make OEPIX a fairly risky fund. But the flip side of that is OEPIX is most heavily invested in the kind of companies that have the financial resources to weather this slump in oil. Plus, the higher risk also comes with the potential for more gains when oil prices rebound.
Investors interested in OEPIX will need a bit of a chunk of change to buy in, with a minimum $15,000 required for the initial investment. And that leverage also costs you in a high expense ratio.
As of this writing, Kent Thune did not hold a position in any of the aforementioned securities. Under no circumstances does this information represent a recommendation to buy or sell securities.