If you are looking for the best oil mutual funds, there are 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 the world will steadily decrease its dependency on oil, investing in crude may 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.
Pros and Cons of Oil Mutual Funds
Before getting involved in oil mutual funds, it is important to consider the pros and cons of such an investment, as they can help you determine the best strategy for making a profit.
Investing in oil-related industries can result in large returns
Equity energy funds offer moderate, less risky exposure to oil-related industries
Master limited partnerships (MLPs) are best for those looking for high yields
There are no mutual funds that invest directly in crude oil
A large allocation to one energy sector is inherently risky
MLP performance can be volatile
Best Types of Mutual Funds to Profit From Oil
There are two primary types of mutual funds that have a significant correlation to movements in the price of oil: equity energy funds and natural resources funds.
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?
Best Equity Energy Mutual Funds
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 known as 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 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 (REITs), MLPs are “pass-through” investment vehicles that don’t pay taxes 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 assets like oil and gas.
Here are a few of the best energy sector mutual funds to consider for your portfolio.
This equity energy fund from Vanguard provides broad exposure to the energy sector with about 120 stocks, such as top holdings XOM, Chevron Corp. (CVX), and BP plc (BP). Although some energy sector funds can include 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 like oil. 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 0.37% or $37 for every $10,000 invested, and the minimum initial purchase is $3,000.
If you want heavy exposure to energy stocks, FSENX may be the best choice. More than 50% of the total portfolio assets are allocated to the top ten holdings, which include CVX, XOM, and EOG Resources (EOG). The portfolio consists of about 50 holdings, which is normally at least 80% energy sector stocks. The expense ratio for FSENX is 0.78% and there is no minimum to start investing.
Investors looking for a diversified energy fund that is thoughtfully managed should look at APWEX. Although not a household name, Cavanal Hill is a mutual fund company that invests in quality stocks that it believes, in its 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 15% 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 1.16% and the minimum initial investment is an affordable $100.
This MLP fund focuses the majority of its assets on limited partnerships involved in petroleum transportation and natural gas pipelines. MLP performance can be volatile and the structure is 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% or more.
The expense ratios of MLP funds can be complex and high.
The fund typically returns fees, where the net expenses are 1% or less. Again, research MLPTX and other MLP funds before investing. They can be great tools if used correctly.
Best Natural Resources Mutual Funds
Natural resources are a broad reference to commodity-based industries such as energy, chemicals, minerals, and forest products inside and outside of the U.S. Here are two natural resources funds that are low-cost, no-loads with average to above-average exposure to oil-related industries compared to other natural resources funds.
This natural resources fund from Fidelity concentrates about 20% of portfolio assets on energy sector stocks, such as CVX and XOM, about 44% on metals, and almost 34% on agriculture (the rest is considered "other"). The global reach for FFGCX can offer greater diversification compared to natural resources funds that focus only on the North America region. The expense ratio for FFGCX is 1.06% and no minimum deposit to start investing.
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 115 stocks, with about 52% being U.S. companies and about 41% overseas. More than 12% of the portfolio is energy industrial stocks, while another 11% 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 0.69% and the minimum initial investment 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, are inherently risky. Sector exposure for most investors is suggested to be no more than 5% to 10% of the total portfolio assets. So if you're interested in investing in oil, mutual funds may the way to go. Just keep your risk tolerance and investment goals in mind before buying into these funds.
The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.