Five 401k Funds to Hedge vs. Costly Oil

tdp2664
InvestorPlace
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. Here’s 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 500′s 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. It’s 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.