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.

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