7 Best Mutual Funds to Profit From Oil
Mutual Funds That Profit From Rising Oil Prices
If you are looking for the best oil mutual funds, there's a few smart ways to do it. There's no doubt that oil prices have been volatile in recent years. But unless you think that oil is an unlimited resource (it's not) or that the world will steadily decrease it's dependency on oil (doubtful for the foreseeable future), investing in crude can be a smart idea, especially if implemented wisely.
Although there are no mutual funds that invest directly in oil, there are plenty of top funds to buy that can provide investors with exposure to oil-related industries. In different words, investors can get indirect exposure to oil with mutual funds and profit as oil prices rise over time.
Best Types of Funds to Profit From Oil
There are two primary types of mutual funds that have significant correlation to movements in the price of oil. For example, if you felt that the price of oil was going to move higher, either in the short term or in the long run, and you wanted to take advantage of that potentiality with mutual funds, you could do so with most equity energy funds and some select natural resources funds.
If you want the highest exposure, or highest correlation, to the price of oil, you may also want to consider using commodity ETFs.
Put simply, if you want to get exposure to oil, there are many ways to do it. But which are the best mutual funds that invest in oil-related industries?
With that backdrop in mind, we highlight 10 mutual funds in three different categories that can benefit from rising oil prices. Even better, we'll only include oil-related mutual funds that are no-loads and the majority have below-average expenses for the category.
Best Equity Energy Mutual Funds to Profit From Oil
Oil prices can be volatile and some investors may not want to have full exposure to the commodity but rather moderate exposure through equity energy funds, which are also called energy sector funds. For example, most energy funds invest in oil-related industries involved in producing and distributing energy, including oil companies, electric companies, wind and solar power, and the coal industry. Examples of energy corporations include include Exxon Mobil (XOM), Haliburton (HAL), and Southwestern Energy Company (SWN).
There is also a sub-sector of specialty energy funds that invest in master limited partnerships, or MLPs. Like real estate investment trusts, or REITs, MLPs are “pass through” investment vehicles that don’t pay tax at the fund level but are required to pay out most of their current income to investors. So the primary difference is that, instead of investing in real estate, MLPs invest primarily in energy (oil and gas) assets.
Now let's take a look at some of the best energy sector mutual funds:
- Vanguard Energy (VGENX): This equity energy fund from Vanguard provides broad exposure to the energy sector with more than 135 energy stocks, such as top holdings XOM, Chevron (CVX), and Pioneer Resources (PIONF). Although some energy sector funds can include some stocks of companies outside the energy sector, VGENX focuses only on energy stocks. This pure focus makes VGENX a good choice for investors wanting full exposure to energy. This narrow focus can make the fund more volatile than the broader market but that's the nature of sector funds -- to get exposure to one sector, although at relatively low asset allocation in the portfolio. VGENX has a low expense ratio of 0.41 percent, or $41 for every $10,000 invested, and the minimum initial purchase is $3,000.
- Fidelity Select Energy (FSENX): If you want heavy exposure to energy stocks, FSENX may be the best choice. More than 50 percent of the total portfolio assets is allocated to the top ten holdings, which include CVX, XOM and EOG Resources (EOG). The portfolio consists of about 75 total holdings, which is normally at least 80 percent energy sector stocks. Historical returns, especially long-term, for FSENX consistently rank in the top third of funds in the energy sector. The expense ratio for FSENX is 0.79 percent and the minimum initial investment is $2,500.
- Cavanal Hill World Energy (APWEX): Investors looking for a diversified energy fund that is thoughtfully managed should take a look at APWEX. Although not a household name Cavanal Hill is a mutual fund company that invests in quality stocks that they believe, in their words, "have excellent growth potential while trying to minimize downside." Unlike typical energy funds, APWEX invests in a combination of U.S. equities and foreign stocks and even adds bonds (around 5 percent of assets) to the mix. Although the fund has only been on the market since 2014, it's already earned a 5-star rating from Morningstar. Expenses for APWEX are average for the energy sector category at 1.20 percent and the minimum initial investment is an affordable $100.
- Oppenheimer Steelpath MLP Select 40 (MLPTX): This master limited partnership, or MLP, fund from Oppenheimer focuses the majority of fund assets on limited partnerships involved in petroleum transportation and natural gas pipelines. MLP performance can be volatile and their structure, as previously mentioned in this article, are complex. So investors considering purchasing these funds should do more homework than usual before buying. With that said, MLPs are probably best for investors looking for high yields, often as high as 7 percent or more. Also the expense ratios of MLP funds can be complex. For example, the prospectus expense ratio for MLPTX is 4.66 percent, which is extremely high. However the fund typically returns fees, where the net expenses are 1 percent or less. Again, do your homework on MLPTX and other MLP funds before investing! They can be great tools if used correctly.
Best Natural Resources Funds to Profit From Oil
Natural resources are a broad reference to commodity-based industries such as energy, chemicals, minerals, and forest products in the U.S. or outside of the U.S. In our list of natural resources funds, we'll include those that are low-cost, no-loads that have average to above-average exposure to oil-related industries compared to other natural resources funds.
- Fidelity Global Commodity (FFGCX): This natural resources fund from Fidelity concentrates about one-third of portfolio assets on energy sector stocks, such as CVX, Total SA (TOT), and Anadarko Petroleum Corp (APC). The global reach for FFGCX can offer greater diversification compared to natural resources funds that focus only on the North America region. Expenses for FFGCX are 1.13 percent and the minimum initial purchase amount is $2,500.
- T. Rowe Price New Era (PRNEX): If you're looking for a low-cost mutual fund that offers above-average exposure to oil-related industries compared to other natural resources funds, PRNEX is a smart choice. The portfolio consists of approximately 120 stocks, with about two-thirds being U.S. companies and one-third overseas. More than 40 percent of the portfolio consists of energy sector stocks and the capitalization is spread across small-, mid- and large-caps. The expense ratio for PRNEX is 0.67 percent and the minimum initial investment to open an account is $2,500.
- Columbia Global Energy and Natural Resources Fund (UMESX): This natural resources fund offered by Columbia ThreadNeedle Investments holds nearly 60 percent energy stocks, which is nearly double the exposure to the energy sector compared to category peers. Expenses of 1.10 percent are slightly above average compared to category peers but the above-average trend for long-term returns can be worth the cost. Investors considering UMESX should keep in mind that the fund has limited access and is available on a select group of trading networks, the largest being Fidelity, Scottrade and Etrade. The minimum initial purchase for UMESX is $2,000.
On a final and summarizing note, sector funds can be used wisely as diversification tools but large allocations to one sector, such as energy, is inherently risky. Sector exposure for most investors is suggested to be no more than 5 percent to 10 percent of the total portfolio assets.
Disclaimer: The information on this site is provided for discussion purposes only, and should not be misconstrued as investment advice. Under no circumstances does this information represent a recommendation to buy or sell securities.