How to play the market in oil and energy?

As a follow-up to my post from yesterday, let us see how we can play the market in light of the new developments in crude and alternative energy. Investing in crude oil futures / options is highly risk-prone because of the vast fluctuations and the global drive to reduce reliance on these energy sources. A better option to play the energy markets is mutual funds that invest in companies that not only mine and process crude oil but also in companies on the frontiers of exploration and that provide related goods and services.

First, we head over to Yahoo Finance’s list of the top performers in the Specialty – Natural Resources category. Our preference is for funds that have consistently shown great performance i.e. funds that show up in as many of the different lists – 3 month, 1 year, 3 year and 5 year – as possible. Here it is easy to see that Jennison Natural Resources has been a consistent top performer since it appears in all 4 lists. The only close competitor is U.S. Global Investors Global Res (PSPFX) which is ranked first in 3 of the 4 lists. Both these funds are rated 4 stars by Morningstar representing an almost similar risk / reward ratio. The 2 significant differences are in the minimum investment amount – $5,000 for US Global and $2,500 for Jennison – and in the expense ratio which is higher for Jennison (1.97%) as compared to US Global (1.30%). So the choice is apparent: if you have 5K or higher to invest and are willing to put it in one basket, go for US Global. If you’re like me and want to put smaller chunks of money in different investments, go for Jennison (PNRCX).

PNRCX also meets the requirements discussed earlier – if you see its holdings it has substantial (lucrative) investments in companies like GlobalSantaFe, Suncor Energy, National-Oilwell, etc. and no great exposures to the big oil majors like Chevron, BP, etc.

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