Investing in crude oil can be a smart idea unless you think that oil is an unlimited resource or that the world will decrease its dependency upon it. There are no mutual funds that invest directly in oil, but plenty of top funds can expose you to oil-related industries. You can get indirect exposure to oil with mutual funds, and you can profit as oil prices rise over time.
- Oil prices can be volatile, and investing in a single sector can be risky.
- Equity energy sector funds can offer moderate exposure to the oil industry, which helps mitigate risk.
- Some specialty funds invest in master limited partnerships (MLPs) to create "pass-through" vehicles that don't pay taxes at the fund level.
- Natural resource funds invest in commodity-based industries such as energy, chemicals, minerals, and forest products.
Pros and Cons of Oil Mutual Funds
Oil prices are subject to ups and downs, so it's key to think about the pros and cons of this type of investment.
Investing in oil-related industries can result in large returns
Equity energy funds offer less risky exposure to oil-related industries
Master limited partnerships (MLPs) are best for those looking for high yields
No mutual funds invest directly in crude oil
A large allocation to one energy sector can be risky
MLP performance can be volatile
Best Types of Funds To Profit From Oil
Two types of mutual funds that have a great correlation to movements in the price of oil are equity energy funds and natural resources funds.
If you felt that the price of oil was going to move higher, either in the short term or in the long run, and if you wanted to take advantage of that with mutual funds, you could do so with most equity energy funds and some select natural resources funds as well. You may also want to think about using commodity ETFs if you want high exposure or a high correlation to the price of oil.
Best Equity Energy Funds
Oil prices can be all over the board, which is why investors may not want to have full exposure. They'd rather have moderate exposure through equity energy funds. These are also known as "energy sector funds." Most energy funds invest in oil-related industries that are involved in producing and distributing energy, including the oil, electric, wind, solar power, and coal industries.
Energy corporations include Exxon Mobil (XOM), Haliburton (HAL), and Southwestern Energy Company (SWN).
There's also a subsector of specialty funds that invest in master limited partnerships (MLPs). These are "pass-through" vehicles that don't pay taxes at the fund level. They're required to pay out most of their current income to investors, similar to real estate investment trusts (REITs). The major difference between MLPs and REITs is that MLPs invest mostly in energy assets like oil and gas instead of in real estate.
These are a few of the best energy sector mutual funds you might want to think about.
Vanguard Energy Fund Investor Shares (VGENX)
This equity energy fund from Vanguard provides broad exposure to the sector with about 44 stocks. These include top holdings Shell PLC (SHEL), ConocoPhillips (COP), and TotalEnergies (TTE).
Some energy sector funds include stocks of companies outside the energy sector, but VGENX focuses only on energy stocks. This pure focus makes VGENX a good choice if you want full exposure to oil. The narrow focus can make the fund more volatile than the broader market. That's the nature of sector funds.
VGENX has a low expense ratio of 0.37%, or $37 for every $10,000 invested. The minimum startup purchase is $3,000.
Fidelity Select Energy (FSENX)
FSENX may be the best choice if you want heavy exposure to energy stocks. Approximately 60% of the total portfolio assets are allocated to the top ten holdings. These include Exxon Mobil Corp (XOM), Chevron Corp (CVX), and ConocoPhillips (COP). The portfolio consists of 60 holdings.
The expense ratio for FSENX is 0.85%. There is no minimum to start investing.
Cavanal Hill World Energy Fund Investor (APWEX)
Investors looking for a diversified energy fund that is managed well should look at APWEX. It's not a household name, but Cavanal Hill invests in quality stocks that it believes "have excellent growth potential while trying to minimize downside."
Unlike many energy funds, APWEX invests in a combination of U.S. equities and foreign stocks. It even adds bonds—around 15% of assets—to the mix. The fund has only been on the market since 2014, but it's earned a five-star rating from Morningstar.
Expenses for APWEX are average for the energy sector category at 1.15%.
Invesco Oppenheimer SteelPath MLP Select 40 Fund (MLPFX)
This MLP fund focuses most of its assets on limited partnerships that are involved in domestic infrastructure, such as petroleum transportation and natural gas pipelines. MLP performance can be up and down. The structure is complex. Do your homework before buying these funds. MLPs are often best if you're looking for high yields, often as high as 8% or more.
The expense ratios of MLP funds can be complex and high.
The fund often returns fees where the net expenses are 1% to 2%. Research MLPTX and other MLP funds before investing. They can be great tools when they're used right.
Best Natural Resources Funds
Natural resources are commodity-based industries such as energy, chemicals, minerals, and forest products. They're both inside and outside the U.S. The two natural resources funds here are low-cost, no-loads with average to above-average exposure to oil-related industries compared to other natural resource funds.
Fidelity Global Commodity Stock Fund (FFGCX)
This fund from Fidelity concentrates about 32% of its assets on energy sector stocks, such as CVX and XOM. Almost 36% is focused on agriculture. About 30% is focused on metals. Everything else is tagged "other." The global reach for FFGCX can offer greater diversification compared to natural resource funds that focus only on the North America region.
The expense ratio for FFGCX is 0.94%. There's no minimum investment.
T. Rowe Price New Era Fund (PRNEX)
PRNEX is a smart choice if you're looking for a low-cost fund that offers above-average exposure to oil-related industries. The portfolio consists of around 100 stocks, with about 53% being U.S. companies and about 41% overseas, with the balance of assets held in convertibles, cash, and other forms of investment. About 13% is in energy industrial stocks. Another 13% is in metals and mining.
Other sectors include chemicals, integrateds, and energy services and processors. The capitalization is spread across small-, mid-, and large-caps. The expense ratio for PRNEX is 0.72%. The minimum startup purchase to open an account is $2,500.
The Bottom Line
Sector funds can be used wisely as diversification tools, but large allocations to one sector, such as oil and energy, can be risky. Sector exposure for most investors is suggested to be no more than 5% to 10% of the total assets. Mutual funds may be the way to go if you're thinking of investing in oil. Just keep your risk tolerance and investment goals in mind before buying into these funds.
Frequently Asked Questions (FAQs)
Is there an oil index fund?
There is no index or mutual fund that invests directly in oil, but you can invest in companies that engage in the oil industry through oil-focused exchange-traded funds (ETFs).
Are oil mutual funds a good investment?
All investments carry a level of risk, and so there is always a chance that you will lose money. The performance of any given fund will depend on its particular portfolio and the larger market context. If you're interested in oil funds, talk with a financial advisor about your goals for the investment, and make sure you do your research on a fund's performance history and portfolio allocation. Timing is also crucial, as the activity in the oil industry will influence stock prices.
Am I contributing to environmental harm if I invest in oil?
There is a link between your investment in oil-based funds and the market for fossil fuels. However, there are nuances. If you have hesitations about investing in the oil industry for environmental reasons, you may want to look into the renewable energy sector instead. There are many specific funds dedicated to clean energy.