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.

NYT: Going online for savings

NYT has an interesting article on online savings banks, covering most of the popular ones like HSBC, ING Direct, Emigrant and Citibank. These banks have started offering upto 4.8% yields in some cases, which at zero-risk (since these are FDIC-insured) makes this a better investment option as compared to several mutual funds / stocks.

My personal favorite is HSBC with its clean interface, trustworthiness, ATM withdrawals and competitive interest rates. They had an offer where you got a $25 bonus by entering the promo code start while filling in your application [thanks Spoofee, for the tip] although I am not sure whether its working now.

Primer on Investing in Metals

SFGate has an interesting article with a wealth of info for people wanting to start investing in metals (although a bit dated):

There are several ways for individuals to invest in metals, including stocks, mutual funds and ETFs, direct and indirect ownership of the metal, or futures contracts.

Some ways to gain exposure to metals:

  • Stocks: Owning companies that mine for and produce various metals.
  • Mutual funds and exchange-traded funds: Most focus on gold, which tends to be influenced by currency and geopolitical issues.
  • Direct ownership: Precious- metals dealers and online trading firms sell silver, gold, platinum and palladium.
  • Futures contracts: Potentially the riskiest — and most lucrative — way to play metals.

The article goes on to give the outlook on the most important metals and how you can get a piece of the action

Investing in Foreign Stocks

Knowledge@Wharton has an interesting article on investing in Foreign Stocks:

… Siegel says the typical American investor should have 40% of his or her equity portfolio in foreign stocks, since many foreign markets have greater potential for growth than the well-developed U.S. market. "The U.S. will, over time, become a narrower and narrower slice of the world market. Just as you don't want to confine yourself to two industries in your portfolio, you don't want to confine yourself to one country…. I really advise broad diversification"

The gist:

  • Investing in foreign index funds might be better than managed funds because of their lower costs
  • Just as it is wise to diversify holdings across industries, it is wise to diversify across countries

I myself have positions in the Principal International Separate Account, a managed fund available through my 401-K plan and have made an annualized return of upwards of 30% on it.