3 ways to let Big Oil fill your 401k

These funds allow regular folks to hedge against high gas prices. With video on oil company earnings.

By InvestorPlace Apr 29, 2011 10:53AM
By Jeff Reeves, editor of InvestorPlace.com

Big Oil is back. With persistently high crude prices, it would be nearly impossible not to make huge profits. The standout this week was Exxon Mobil (XOM). Its earnings surged by 69% to $10.7 billion. But the entire industry is on the rise, with even the beleaguered BP (BP) posting a profit of $5.48 billion, thanks to expensive oil.

 

As should be no surprise, investors have been pouring money into the oil majors and other related energy companies. It's been a red-hot trade. But if you have been watching prices at the pump more than the stock market, you probably don't have time for analyzing and picking stocks.


To help you out, here are three funds that take the guesswork out of oil investing by spreading your money across a variety of important businesses in the sector:

 

Post continues after video on oil company financial results:

 

iShares Dow Jones U.S. Energy Sector Index Fund (IYE)


This ETF is your simplest way to play big oil. It's top holdings include:

Though the heavy focus on Exxon will skew the returns a bit towards the performance of this individual stock, it is diversified enough to give most investors peace of mind. And with a reasonable expense ratio of under 0.5% and a one-year return of 30% that has almost tripled the S&P 500's performance, this ETF seems a powerful energy play right now.

Fidelity Select Energy (FSENX)

 

If Fidelity funds are part of your 401k plan, consider this offering. It is a highly selective energy fund that understands the geopolitical risks associated with Middle East oil as well as the potential for the catastrophic failure of off-shore rigs and tankers and pipelines.


With these ever-present risks, fearlessness is a necessary quality of profitable oil investing -- and key attribute of John Dowd, who manages the Fidelity Select Energy fund. The FSENX fund currently has $3.1 billion in assets due to his stewardship.

Top holdings include some of the previously mentioned oil majors like Exxon, Chevron and Schlumberger, but the total list of 74 picks goes deep into the sector to maximize profit potential.

True, his results can be subject to swings -- and he may be early on his trades. But over time, there is usually a nice payoff. For the past year, the fund has returned 33%.

 

Vanguard Energy (VGENX)

 

Oil stocks can quickly go from being "growth" plays with steadily increasing numbers  to value opportunities that seem to be good investments selling at bargain prices in hard times. But with the recent run-up in oil, the sector looks more like it’s in the growth phase right now.

 

Vanguard Energy has a penchant for finding values, so it's focus may not be perfect right now. Yet major positions in majors like Exxon, Chevron and Shell allow this fund to ride energy prices up -- and when crude oil prices peak and the massive profit increases dry up, it will be able to insulate your portfolio by focusing on value.

 

Vanguard Energy has a buy-and-hold bent, with a turnover ratio of only 31%. The expense ratio is also at a low 0.34%. So while the mutual fund's 12-month return is "only" 17% -- significantly better than about 12% for the broader market -- those with long-term investing goals can rest assured that Vanguard Energy isn't a quick trade that needs to be managed actively. The long-term philosophy of this fund makes it a very good play for 401k investors looking at retiring years from now and not just making a quick buck in the next few weeks.


Jeff Reeves is editor of InvestorPlace.com. As of this writing, he did not own a position in any of the stocks or funds named here. Follow him on Twitter via @JeffReevesIP and become a fan of InvestorPlace on Facebook.

 

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2Comments
May 31, 2011 12:29PM
avatar
Invest in big oil. get screwed by big oil, they don't care they will get your money one way or the other.
Apr 30, 2011 4:16PM
avatar
This is easily solved.  If you don't like big oil, sell your shares, and reinvest in small oil.  If you don't like Big Oil, quit buying gas from them, buy from the smaller distributor gas stations.  We have the power.  If you can save 1 cent by buying across the street, buy across the street;.  What kind of effect do you think that could have?  Quit driving your cars and walk more.  Most miles are short miles.  You will live longer as a result.  Set your thermostats down.  What would that do?  Drive the car in your driveway with the best fuel mileage, leave the other one set as much as possible.  Don't spend money in their fuel stations, for over priced goods, go to the grocery store.  Go to the cigarette store.  Go to the banks ATM.  We do have the power.  Quit giving them your money, unless, they have the best price on whatever you buy.  Don't pay at the pump.  Make them employ people to take your money.  This is what I do.  You should do the same.
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