Now below $55, oil has slipped into price levels not seen since the Great Recession of 2008.
Crude is crashing because there’s too much global oil supply and not enough demand. Saudi Arabia is trying to price out the weaker energy players by convincing OPEC to keep up production as prices fall. It also appears that Saudi Arabia is temporarily testing the strength of America’s production and energy market.
No matter the geopolitical environment, this downward spiral will eventually end. We investors may look at this as the beginning of a new oil era defined by stagnant or declining prices for the foreseeable future or just a transitional period in which prices are adjusting to the realities of the current economic environment. The latter perspective is most likely to be the rational and prevailing one (although markets and investors can be irrational).
But before I digress into theories that are only provable in hindsight, the reality is that oil prices are extremely depressed and long-term investors have an opportunity to capitalize on it.
Choosing the Best Energy Funds to Buy Now
Now is a good time to focus on energy funds that hold stocks of big oil companies that have the capacity to make adjustments, such as cuts in capital expenditures, and possibly avoid the worst of more downside pressure until prices make their move higher. The smaller firms, which often have heavier debt loads and more competition, are vulnerable to further price declines.
For similar reasons, it is wise to stick with U.S. energy firms that can stave off the worst of the downside but still take advantage of the upside. Oil-rich emerging markets, such as Russia, Brazil and Venezuela, appear too unstable to bet on. Therefore, the U.S. energy firms may be the sweet crude spot for both the short- and intermediate-term market environment.
In summary, if and when the investor herd is ready to buy shares of energy stocks and mutual funds that invest in them, their risk appetites are not likely to be strong. And that further underscores the logic of buying funds that focus on big domestic energy names.
With that in mind, here are three of the best energy funds to take advantage of the drop in oil prices.
- Energy Select Sector SPDR (XLE): This ETF is comprised almost entirely of U.S. large-cap value stocks, such as ExxonMobil (NYSE: XOM) and Chevron Corp. (NYSE: CVX). While the price for XLE has fallen nearly 22% in the past three months, it’s still outperforming 91% of its equity energy category peers. Plus, the expense ratio for XLE is a cheap 0.16%.
- Vanguard Energy Inv (VGENX): This mutual fund has also held up well compared to other energy sector funds in the past few months, ranking in the top 23% of category peers. If you’d like to stick your neck outside the United States a bit, 25% of VGENX’s portfolio is invested in Europe and Asia. Rounding out Vanguard Energy’s attributes is its low 0.38% expense ratio. You can get into VGENX with an initial purchase minimum of $3,000.
- Fidelity Select Natural Resources (FNARX): If you are looking for a well-managed fund with a solid long-term track record, this is a mutual fund worth a closer look. At the helm for more than 8.5 years, manager John Dowd can take credit for the 3rd percentile rank for the 10-year return of FNARX, outperforming 97% of the energy sector. The short-term and intermediate-term returns also rank in the top half of the energy category, which is a rare feat in a group of sector funds that tend to frequently go in and out of favor. The portfolio holdings recently consisted of approximately 95% U.S. energy stocks, with the remaining 5% in Greater Europe. The expense ratio of FNARX is below average at 0.84%, and the minimum initial investment is $2,500.
In the short run, the oil slide is a market worry; in the long run, it is a necessary correction that may prove to be one of many buying opportunities. Therefore, the main idea here is not to attempt to pick a low point but to buy at increasingly lower points.
In different words, don’t try to buy low and sell high. Simply buy lower and sell higher.
OPEC’s Worst Nightmare Comes True
The U.S. has been forced to deal with backward, oppressive regimes, like Saudi Arabia, for decades — simply because geography had blessed them with massive reserves of the life-blood of modern society — oil. Well, that dominance is now over. Because the United States is set to become THE leading energy producer in the world. This is the day the Saudi’s — and every other OPEC nation — prayed would never come. And we’ve found a great way for the average guy to cash in. Click here for all the details.