Improved technology and new discoveries have allowed mining and exploration companies to extract greater quantities of raw materials from the earth more quickly and efficiently than ever before. The spike in oil prices over 2004-2008 also attracted the attention of many reluctant investors, but some are not qualified to invest in working interests, drilling partnerships or other high-risk ventures, and lack the capital necessary to purchase royalty interests.

Natural resource funds provide diversified exposure to a large segment of the economy, and often with less risk to investors than direct participation programs. This article will examine the nature and composition of these funds, as well as the type of investor for whom they are appropriate. (To read more on this topic, check out Personalizing Risk Tolerance.)

What Is a Natural Resources Fund?
Natural resources funds are funds that invest in the stocks of companies that are in the business of extracting, developing, refining and processing raw materials of any kind. Although this primarily pertains to energy and fossil fuel companies, it also includes timber and forestry, and alternative sources of energy, as well as other ores and minerals. Companies that provide technology, equipment and other related goods and services can be included here as well.

Sometimes this sector includes precious metals, even though they also have their own classification. The vast majority of natural resource funds also tend to invest almost exclusively in stocks, either domestically or globally. Many of these funds fall into the growth category in the Morningstar style box, although value and blended funds exist as well. Funds of all market capitalization ranges exist within these parameters. (To learn more, check out Build A Model Portfolio With Style Investing.)

Historical Performance
Like real estate funds, natural resource funds tend to follow their own cyclical paths, and have a relatively low correlation with the overall market. The performance of natural resource funds is most affected by major discoveries of deposits of any kind of mineral or fuel being searched for. This sector has been buoyed in the 2000s by the spike in oil prices and rising prices for gold and other metals.

According toFundAlarm, the natural resource sector was the best-performing sector of Morningstar's eight specialty categories in a five-year period ending in 2008. The average annual total return of the natural resource sector for the five-year period ending on July 31, 2008, was a whopping 27%.

Advantages and Disadvantages of Natural Resources Funds
Most energy analysts agree that 2004 represents the start of an extended long-term period of growth in the oil and gas industry. Explosive industrial growth in China and Pacific Rim countries has fueled a rising demand for oil that the world has had to scramble to meet in some respects. This increase in demand is also coming at a time when some of the traditional major oil fields in Saudi Arabia and other countries in the Middle East approach depletion. Historically, the worldwide demand for oil has doubled approximately every 10 years, and this pattern shows few signs of slowing. (To read more, check out Peak Oil: Problems and Possibilities.)

Major improvements in drilling technology have also reduced the environmental impact of traditional drilling. New seismic imaging sensors can pinpoint where oil is located underground with much greater accuracy than was possible just a decade ago. In the 1970s, large-scale drilling ventures required that enormous holes be dug into the earth in order to be successful, but only a small fraction of the same amount of ground must now be disturbed in order to achieve the same results.

Who Should Invest in a Natural Resource Fund?
Investors seeking long-term growth outside the mainstream markets should consider natural resource funds. Those who want professional management and diversification in this sector will look to these funds as primary vehicles.

The Bottom Line
Natural resources funds offer investors yet another avenue of long-term growth outside the broader markets. Although performance in 2009 and beyond may be more sedate than in preceding decades, these funds are still likely to post solid gains over time.

Related Articles
  1. Mutual Funds & ETFs

    Top 5 Bear Market Mutual Funds

    Discover five bear market mutual funds that investors can turn to for generating maximum capital appreciation during a bear market.
  2. Mutual Funds & ETFs

    4 Mutual Funds to Consider If Interest Rates Rise

    Learn what mutual funds will perform best if interest rates rise. Interest rates can rise due to inflation or to an improving economy.
  3. Mutual Funds & ETFs

    Top 5 Chinese Mutual Funds

    Learn about some of the most popular and best performing mutual funds that offer investors exposure to the important emerging market economy of China.
  4. Investing Basics

    What is a Settlement Date?

    A settlement date is the day a security trade must be settled.
  5. Investing Basics

    Explaining Risk-Adjusted Return

    Risk-adjusted return is a measurement of risk for an investment or portfolio.
  6. Investing

    Five Things to Consider Now for Your 401(k)

    If you can’t stand still, when it comes to checking your 401 (k) balance, focus on these 5 steps to help channel your worries in a more productive manner.
  7. Professionals

    Index or Target Dates in 401(k)s: Which is Better?

    A common question is whether or not plan participants should choose index or target date funds in a 401(k). The answer depends on different scenarios.
  8. Investing

    6 Reasons Why Every Investor Should Consider ETFs

    Once you understand the benefits of ETFs, you’ll see how they could be an exciting and smart way to help meet your financial goals. Here some key facts.
  9. Term

    What's an Investment Advisor?

    An investment or financial advisor makes investment recommendations and analyzes securities.
  10. Investing News

    Understanding How Mutual Funds Pay Dividends

    The process by which mutual fund dividends are calculated, distributed and reported is fairly straightforward in most cases. Here's a look.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Series 6

    A securities license entitling the holder to register as a limited ...
  3. Exchange-Traded Mutual Funds (ETMF)

    Investopedia explains the definition of exchange-traded mutual ...
  4. Dividend

    A distribution of a portion of a company's earnings, decided ...
  5. Sharpe Ratio

    A ratio developed by Nobel laureate William F. Sharpe to measure ...
  6. Historic Pricing

    A method for calculating the value of an asset using the last ...
RELATED FAQS
  1. How does fracking affect oil prices?

    Hydraulic fracturing has helped boost the rate at which oil and gas can be extracted from wells, particularly in the United ... Read Full Answer >>
  2. Is there a situation in which wash trading is legal?

    Wash trading, the intentional practice of manipulating a stock's activity level to deceive other investors, is not a legal ... Read Full Answer >>
  3. What action is the SEC likely to take on 12b-1 fees?

    The Securities and Exchange Commission (SEC) may take action to impose greater regulation on how 12b-1 fees are used, or ... Read Full Answer >>
  4. What is considered a reasonable 12b-1 fee?

    A reasonable 12b-1 fee is generally considered to be 0.25% of the assets of the mutual fund. The maximum amount allowed for ... Read Full Answer >>
  5. What are some of the most common mutual funds that give exposure to the retail sector?

    There are a number of mutual funds that give exposure to the retail sector. Three of the most popular funds are the Fidelity ... Read Full Answer >>
  6. What is the 12b-1 fee meant to cover?

    A 12b-1 fee in a mutual fund is meant to cover the fees of companies and individuals through which investors of a fund buy ... Read Full Answer >>

You May Also Like

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!