After emerging as a top performer in 2016, the energy sector had a relatively turbulent ride in 2017. Till September, oil prices remained volatile and were seen hovering within the $45-$55 per barrel range. However, things have started to look up for this space over the past few months with prices consistently trading above the $60 per barrel mark.
A number of factors have propelled this positivity. These include the OPEC-led production cut extension, lower inventory overhang and rising demand. A strong rally in oil prices makes investing in mutual funds from the energy sector a prudent choice.
Oil Prices Environment Upbeat
Crude supply has been normalizing, which has pushed the price of WTI and Brent to new three-year highs. The improving commodity pricing environment looks somewhat sustainable on the back of tailwinds like OPEC production cuts which are expected to continue till 2018-end along with improved demand outlook.
On Nov 30, 2017, OPEC members met non-OPEC players to decide on an extension of the crude production cut accord, first signed in late 2016. OPEC and fellow exporters also announced plans to remain open to extend their production-cut agreement beyond March 2018 — an imperative step to combat the global crude glut. Some cartel members including less compliant nations like Iraq have also signaled another round of supply cut.
Adding to the positive momentum, energy bodies OPEC and IEA recently raised global oil demand forecasts for 2018, helping to tighten the market significantly. The booming crude oil and gas exports this year reflect substantial demand for U.S. oil. All these factors point toward the growing stability and growth prospects for the energy sector in 2018.
Crude Price Moves Above $60 Per Barrel
After trading above the $60-a-barrel mark at the end of last year, oil prices started 2018 on a strong note and reached their highest level since 2015. Moreover, in the first week of this year, both WTI and Brent crude prices gained 1.7% and 1.1%, respectively, following a decline in domestic crude inventories for seven straight weeks. Also, recent anti-government rallies in major oil exporter Iran and crude supply cuts by Russia and OPEC countries had a positive impact on oil prices.
With continued slump in domestic crude inventories and persistent unrest in Iran, oil prices are expected to rise higher and benefit the energy sector. This development, along with the crude production-cut agreement between major oil producing nations till the end of this year, is expected to push the energy sector northward in the near future.
5 Best Energy Funds to Buy
The Energy Select Sector SPDR (XLE) has advanced 17.5% over the last six months and was the second biggest gainer among the S&P 500 sectors. Moreover, despite a weak beginning in 2017, the energy sector managed to recover in the second half and continues to maintain the momentum this year. Additionally, in the past three months, equity energy and natural resources mutual funds have gained 12.1% and 9.6%, respectively.
Here, we have highlighted five energy mutual funds that carry a Zacks Mutual Fund Rank #1 (Strong Buy) or 2 (Buy). We also expect these funds to outperform their peers in the future. Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance, but also on the likely future success of the fund.
These funds also come with low expense ratios and no sales load. Moreover, these have encouraging returns in the last three months, and the minimum initial investment is within $5000.
Dreyfus Natural Resources A DNLAX invests the lion’s share of its assets in companies from the natural resources sector. DNLAX seeks capital appreciation over the long run. The fund generally invests in both growth and value stocks, with strong exposure in major natural resources industries. DNLAX not only invests in domestic companies but also in foreign companies.
DNLAX’s return has been 11% in the last three months. Annual expense ratio of 1.34% is lower than the category average of 1.42%. The fund has a Zacks Mutual Fund Rank #1.
Fidelity Advisor Energy T FAGNX seeks growth of capital over the long run. FAGNX invests a chunk of its assets in common stocks of companies engaged in operations related to the energy domain. The fund invests in securities of both U.S. and non-U.S. companies. It is a non-diversified fund and gives precedence to several factors including financial strength and economic condition before selecting a company.
FAGNX has returned 14.3% in the last three months. Annual expense ratio of 1.35% is lower than the category average of 1.49%. It has a Zacks Mutual Fund Rank #2.
Vanguard Energy Investor VGENX invests a major portion of its assets in equity securities of companies from the energy sector. VGENX normally invests in stocks of companies that are engaged in the production, marketing, transmission and research of energy. The fund seeks growth of capital for the long run.
VGENX, with a Zacks Mutual Fund Rank #2, has returned 10.7% in the last three months. Annual expense ratio of 0.41% is lower than the category average of 1.49%.
Columbia Global Energy & Natural Resources Z UMESX seeks capital growth for the long run. UMESX invests more than 80% of its assets in securities of domestic and foreign companies. The fund primarily focuses on acquiring securities of companies from the natural resources and energy industries. Moreover, UMESX invests more than half of its assets in petroleum and crude oil companies.
UMESX has returned 11.1% in the last three months. Annual expense ratio of 1.10% is lower than the category average of 1.42%. It has a Zacks Mutual Fund Rank #1.
Franklin Natural Resources A FRNRX seeks maximization of returns. FRNRX invests a huge chunk of its assets in both equity and debt securities of companies involved in the natural resources sector. The fund may also invest a part of its assets in small-cap companies.
FRNRX has returned 12.5% in the last three months. Annual expense ratio of 1.05% is lower than the category average of 1.42%. It has a Zacks Mutual Fund Rank #2.