There aren't many individuals who don't like a good bargain. Most, or perhaps everyone, loves a great deal and such a bargain is now available in the energy sector. After the rout in crude prices last year, prices have stabilized, and crude is now gaining ground, making the sector a safer investment option. The fundamentals driving the price of the commodity look good, and thus buying energy funds at the current discount would be a prudent move.
The word "downturn" fits perfectly for the energy sector. Crude prices had slumped to below $50 a barrel. Thus, the profit margins of several players from the industry have seen massive declines. This has hit stock prices as well.
Nevertheless, this has made their stocks inexpensive and a really good bargain. Funds with strong fundamentals owning potential gainers from the energy sector should do well going forward, somewhat illustrated by their year-to-date gains.
Before we cherry pick the energy funds, let's look at other details.
Fundamentals Driving Crude
Since last June - when oil was trading around $100 per barrel - we saw a prolonged plunge in crude. This was primarily owing to the plentiful North American shale supplies when nobody seemed interested in buying, sluggish growth in China, and a dull European economy. However, the fundamentals are improving now. U.S. Energy Department's weekly inventory release showed that crude stockpiles fell for the fifth straight week despite domestic production notching up to another record. The federal government's EIA report revealed that crude inventories fell by 1.95 million barrels for the week ending May 29, 2015, following a decrease of 2.80 million barrels in the previous week.
But the real booster should be felt on the demand side. The peak summer driving season in the U.S. - started officially this past Memorial Day weekend - and should fuel up crude consumption. According to the American Automobile Association (AAA) and IHS Global Insight, about 37.2 million travelers were forecasted to have traveled by air and road during the Memorial Day weekend. If the prediction is to be believed, then this Memorial Day weekend might have been the busiest in a decade, with the highest travel volume since 2005.
Moreover, we have seen Asian demand for crude increasing. As per Energy Aspects - an independent research consultancy firm in U.K. - notwithstanding a slowing economy in China, the country's crude import touched a record 7.4 million barrels per day in April. Additionally, according to the Ministry of Finance, customs-cleared oil imports in Japan hiked 9.1% from last April to 3.62 million barrels per day in April 2015.
The improving fundamentals - as reflected in growing demand and lower supply - are reflected in the recent West Texas Intermediate (WTI) crude price of $59.72 per barrel, up significantly from the six-year low mark of $43.88 per barrel in March 2015.
3 Energy Mutual Funds to Buy
Here we will list 3 Energy mutual funds that either carry a Zacks Mutual Fund Rank #1 (Strong Buy) or Zacks Mutual Fund Rank #2 (Buy). 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 the likely future success of the fund.
The following funds are rebounding from 1-year loss and have encouraging year-to-date gains.
Fidelity Select Energy Portfolio (MUTF:FSENX) seeks capital growth over the long run. FSENX invests a lion's share of its assets in companies involved in the energy sector including oil, gas, electricity, and solar power. FSENX primarily focuses on acquiring common stocks of companies throughout the globe. Factors such as financial strength and economic condition are considered before investing in a company.
FSENX currently carries a Zacks Mutual Fund Rank #1. Its year-to-date gain is 8.8% as against 12.3% decline over 1-year period. The 3- and 5-year annualized returns stand at 7.9% and 8.5%. The annual expense ratio is 0.79% as compared to category average of 1.44%. FSENX carries no sales load.
Guinness Atkinson Alternative Energy (MUTF:GAAEX) seeks capital growth over the long term. GAAEX invests heavily in domestic and foreign companies from the alternative energy sector. GAAEX invests in companies regardless of their market capitalization and may also invest in developing economies.
GAAEX currently carries a Zacks Mutual Fund Rank #2. Its year-to-date gain is 11.7% as against 7.1% decline over 1-year period. The 3-year annualized return stands at 16.7%. The annual expense ratio of 1.98% is, however, higher than the category average of 1.44%. GAAEX carries no sales load.
Fidelity Advisor Energy T (MUTF:FAGNX) invests in common stocks and in certain precious metals. The fund normally invests at least 80% of assets in securities of companies principally engaged in owning or developing natural resources, or supply goods and services to such companies, or in physical commodities.
FAGNX currently carries a Zacks Mutual Fund Rank #1. Its year-to-date gain is 8.7% as against 12.6% decline over 1-year period. The 3- and 5-year annualized returns stand at 6.1% and 6.4%. The annual expense ratio is 1.34% as compared to category average of 1.44%.