In recent years, the investment profession has increasingly introduced exchange-traded funds, or ETFs, to compete with traditional mutual funds. ETFs have a number of advantages over mutual funds, such as charging lower expense ratios, and trade throughout the day in the same way an individual stock trades on the stock market. In contrast, mutual funds generally trade only once at the price at the end of the day, after all of the individual holdings can be priced and aggregated into a daily fund quote.

It is also usually easier to get a very recent list of holdings. Index ETFs will generally hold the underlying stocks, though for less liquid holdings there may be proxy securities that are meant to mirror the performance of the underlying security. The same goes for mutual fund indexes, too, but more actively-traded ETFs will have more updated holding information. Actively-managed mutual funds usually only report their holdings each quarter and well after the quarter has ended. One benefit of energy mutual funds is that there is a much wider array of actively-managed strategies.

These general differences are important to consider when investing in the energy industry. Below is an overview of some more prominent energy funds and ETF options available to individual investors.

SEE: ETF Liquidity: Why It Matters

Energy ETFs
An energy ETF is likely one of the most convenient and quickest ways to gain exposure to a sector-specific index. The iShares ETF platform currently offers about eight ETFs, including the Energy Index sector funds using the underlying Dow Jones, Standard & Poor's and MSCI indexes. There are also some that offer a purer exposure to the clean and nuclear energy sectors in particular. The expense ratios are generally reasonable and below 1%, with the majority having expense ratios at a 0.5% or less. Vanguard also offers an energy ETF that charges a very reasonable fee of 19 basis points, or 0.19%. ProShares also offers an ETF that invests only in oil and gas companies.

SEE: How To Pick The Best ETF

Energy Mutual Funds
Mutual fund rating firm Morningstar lists in excess of 100 mutual funds in its energy sector category. So far in 2012, the category has reported a negative performance of 7%, though the average three-year return is positive at just under 3%, annually. There a couple of funds that are highly ranked based on the research. This includes another Vanguard offering, the Vanguard Energy Inv that trades under the ticker "VGENX." The BlackRock Energy & Resources Fund, ticker "SSGRX" was also mentioned favorably.

Given the many different offerings, nearly any strategy, be it bearish or bullish on the energy sector, can be employed. There are opportunities to gain exposure to varying market capitalizations, whether it's small, mid or large cap. There are also abilities to aim for growth companies, or simply those that pay above average dividend yields that will appeal to income-minded investors.

Certain funds invest purely in energy master limited partnerships that have a reputation for paying out appealing dividends, though tax implications can be complicated. Another popular strategy is alternative energy, as are those that invest in large capitalization energy names, those that pay above average dividend yields and more basic natural resources and basic material commodities.

The Bottom Line
An energy ETF likely represents the most efficient way to gain exposure to the energy sector. The choices trade throughout the day and generally charge reasonable fees. Investors seeking more specific, active strategies may be interested in the wide array of energy mutual funds. Energy index mutual funds may also have appeal because each security is actually held. For less liquid ETF strategies, be sure to read the prospectus to determine how investment strategies are carried out and if the actual securities are held in the portfolio.

Related Articles
  1. 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.
  2. Mutual Funds & ETFs

    ETF Analysis: ProShares UltraPro Nasdaq Biotech

    Obtain information about an ETF offerings that provides leveraged exposure to the biotechnology industry, the ProShares UltraPro Nasdaq Biotech Fund.
  3. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI Europe Financials

    Learn about the iShares MSCI Europe Financials fund, which invests in numerous European financial industries, such as banks, insurance and real estate.
  4. Mutual Funds & ETFs

    ETF Analysis: SPDR S&P Insurance

    Learn about the SPDR S&P Insurance exchange-traded fund, which follows the S&P Insurance Select Industry Index by investing in equities of U.S. insurers.
  5. Mutual Funds & ETFs

    ETF Analysis: SPDR S&P Emerging Markets Small Cap

    Learn about the SPDR S&P Emerging Markets Small Cap exchange-traded fund, which invests in small-cap firms traded at the emerging equity markets.
  6. Mutual Funds & ETFs

    ETF Analysis: ETFS Physical Platinum

    Learn about the physical platinum ETF. Platinum embarked on a bull market from 2001 to 2011, climbing to record prices along with other precious metals.
  7. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI Turkey

    Learn about the iShares MSCI Turkey exchange-traded fund, which invests in a wide variety of companies' equities traded on Turkish exchanges.
  8. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  9. Mutual Funds & ETFs

    ETF Analysis: Guggenheim Enhanced Short Dur

    Find out about the Guggenheim Enhanced Short Duration ETF, and learn detailed information about this fund that focuses on fixed-income securities.
  10. Mutual Funds & ETFs

    ETF Analysis: iShares US Oil&Gas Explor&Prodtn

    Learn about the iShares U.S. Oil & Gas Exploration & Production ETF, which provides an efficient way to invest in the exploration and production sector.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Real Estate Investment Trust - ...

    A REIT is a type of security that invests in real estate through ...
  3. Exchange-Traded Fund (ETF)

    A security that tracks an index, a commodity or a basket of assets ...
  4. Profit Margin

    A category of ratios measuring profitability calculated as net ...
  5. Dividend Yield

    A financial ratio that shows how much a company pays out in dividends ...
  6. Series 6

    A securities license entitling the holder to register as a limited ...
RELATED FAQS
  1. What does a high turnover ratio signify for an investment fund?

    If an investment fund has a high turnover ratio, it indicates it replaces most or all of its holdings over a one-year period. ... Read Full Answer >>
  2. Does index trading increase market vulnerability?

    The rise of index trading may increase the overall vulnerability of the stock market due to increased correlations between ... Read Full Answer >>
  3. What is the difference between passive and active asset management?

    Asset management utilizes two main investment strategies that can be used to generate returns: active asset management and ... Read Full Answer >>
  4. 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 >>
  5. 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 >>
  6. What kind of companies in the utilities sector offer the most stable dividends for ...

    Among the companies that offer the most stable dividends for risk-averse investors are large, solidly established U.S.-based ... 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!