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Investing In Energy Funds

Nov 5, 2007
It's hard to believe with oil approaching $100 per barrel, but the U.S. will consume over 1 billion (that's 1,000,000,000) more gallons of gasoline in 2007 than in 2006.

As a certain President once said, we are energy junkies. We keep craving more regardless of the price. Ask yourself this: Are you plugging more stuff into the wall each year? That requires even more oil, natural gas or coal.

China, India and the other new economies also consume more energy each year. Political instability in Nigeria, Iran, and Venezuela could limit supply. And, there's only so much oil (natural gas and coal) in the ground. I'm not suggesting we'll run out but it will become more expensive to extract it.

How can you ease the pain every time you fill up? Or better, how can you benefit from higher energy prices? By investing in energy companies. There are two ways to do this. You can buy a Natural Resources sector fund or you can buy a Value fund which holds energy stocks. The sector mutual fund is the "pure play."

It holds energy stocks and, probably, stocks of minerals i.e., iron ore and copper, mining companies. The risk with a sector fund is that there aren't a lot of them to choose from and they aren't diversified. Don't get me wrong. A sector fund is diversified within its focus area, i.e., owns a number of energy and mining companies, but any fund which investors in only one part of the economy is inherently riskier then a broadly diversified mutual fund.

The other way to "play energy" is through a large cap or mid cap value fund. These funds typically have some energy exposure. The downside of this approach is that value mutual funds have only a portion of their assets invested in energy stocks.

With either a Natural Resource fund or a Value fund (or any fund, for that matter), don't just go by the name. Different fund managers view and approach their mandates differently. Drill down (no pun intended) and check the fund's holdings to see if they match your expectations.

You can do this by going to the fund's website for a complete list of its holdings. Lists of the top rated Natural Resource and Value funds can be found on websites such as Morningstar, Lipper, Value Line and MUTUALdecision.

Your broker, Schwab is a good example, also may have this information on line. The larger fund families such as Fidelity, T. Rowe Price and Vanguard all have Natural Resource and Value funds and may have information on others, as well.

Which investing approach is right for you? It depends upon how much risk you're willing to take and how your other assets are invested (think diversification of your entire portfolio). Having an energy investment might ease the pain the next time you fill up.
About the Author
Bill Byrnes is co-founder of MUTUALdecision, top mutual funds , providing investors with data on the top mutual funds, and author of the MUTUALdecision Blog. He's been CEO, chairman and served on the board of directors of several public and private companies. He holds MBA and JD degrees and is a Chartered Financial Analyst with over 30 years experience in the investment industry.
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