Five 401k Funds to Hedge vs. Costly Oil

Big Oil is back. With persistently high crude oil prices, it would be nearly
impossible to not make huge profits in this sector of the stock market. This
week, Royal Dutch Shell (NYSE: RDS-A ) reported net income of $6.3 billion and
ConocoPhillips (NYSE: COP ) announced a $3 billion gain. Even the beleaguered BP
plc (NYSE: BP ) posted a profit of $5.48 billion. But the standout was Exxon
Mobil (NYSE: XOM ). Its earnings surged by 69% to $10.7 billion. Some are saying
Exxon profits in 2011 could top 2008 records. As should be no surprise,
investors have been pouring money into the majors as well as many other energy
companies. It's been a red-hot trade. But if you do not have the time for
analyzing and picking stocks, there are some good mutual funds to consider.
Heres a look at some oil mutual funds and ETF investments for your 401k: iShares
Dow Jones U.S. Energy Sector Index Fund (IYE) This ETF is your simplest way to
play Big Oil. The top holdings of the iShares Dow Jones U.S. Energy Sector Index
Fund (NYSE: IYE ) include some of the biggest name in global energy and crude
oil: Exxon Mobil (NYSE: XOM ) 24% Chevron (NYSE: CVX ) 12% Schlumberger (NYSE:
SLB ) 7% Conoco Phillips (NYSE: COP ) 6% Occidental Petroleum (NYSE: OXY )
5%. 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 500s performance, this
ETF seems a powerful energy play right now. Fidelity Select Energy (FSENX) The
oil business can be treacherous. Just consider that during the recent conflict
in Libya, a variety of foreign oil companies have had to shut-down their
operations and take losses. Another big risk is catastrophic failure, such as
with off-shore rigs. Of course, this was the case with BP. But savvy portfolio
managers understand the risks. And yes, it may mean having the guts to buy up
shares of companies like BP at some point. This fearlessness is certainly a key
attribute of John Dowd, who manages the Fidelity Select Energy (MUTF: FSENX )
fund, which has $3.1 billion in assets. 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 33.17%. Invesco Energy A
(IENAX) The oil industry has a huge ecosystem. For example, there are services
companies that help find new deposits and develop wells. As oil prices increase,
these companies benefit from the increased capital investments. As for the
Invesco Energy A (MUTF: IENAX ) oil mutual fund, the portfolio manager, Andrew
Lees, likes the sector. For example, he has big stakes in Schlumberger (NYSE:
SLB ), Halliburton (NYSE: HAL ) and Weatherford International (NYSE: WFT ).
These companies often have lots of earnings leverage and can show spikes on the
top-line. Vanguard Energy (VGENX) Oil stocks can easily go from being growth
plays to value opportunities. But with the recent run-up in oil, the sector
looks more like it's in the growth phase. So this can make things difficult
for Vanguard Energy (MUTF: VGENX ), which has a penchant for finding values. Yet
the fund has been able to locate some good investments. After all, even the
majors like Exxon Mobil (NYSE: XOM ), Chevron (NYSE: CVX ) and Royal Dutch Shell
(NYSE: RDS-A ) still look cheap. And yes, the Vanguard Energy fund has large
stakes in these companies. Oh, and the fund also likes the services companies.
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%. BlackRock Energy & Resources Investors A
(SSGRX) Back in the 1990s, oil prices were fairly depressed. By 1998, a barrel
of oil fetched a price below $10 per barrel. In the case of Dan Rice, who
manages the $2 billion B lackRock Energy & Resources Investors A (MUTF: SSGRX )
fund, he knows that period quite well. Keep in mind that he has been at the helm
of the fund since 1990. Thus, it should be no surprise that Rice keeps a close
look at the global supply and demand for energy. He will then try to find those
companies that look cheap in terms of their growth prospects. In fact, Rice will
also invest in mid-caps and small caps. Its a strategy that has worked extremely
well. Rice has posted an annual average return of 18.44% over the past decade.
Tom Taulli's latest book is " All About Short Selling " and his Twitter
account is @ttaulli . He does not own a position in any of the stocks named
here.