Oil has sneakily made its way back to $70 a barrel, but with all the noise coming out of every corner of the market, the story hasn’t gotten as much play as it would have in the past. Maybe the market is just getting used to seeing sky-high oil prices, desensatized from the mindbending $147 of last summer.
Either way, oil stocks have responded by doing what they are born to do, which is produce big gains.
Small-cap explorations like Encore Aquisition Co. (EAC) and Cimarex Energy Co. (XEC) are up 100% in just the last few months.
But these high-fliers can be risky, something many investors got an unwelcomed taste of last year when the financial sector had a core meltdown.So what to do about scoring some solid energy stock exposure without getting in over your head?
Sounds like mutual fund time to me.
Get Diversified
Mutual funds are a great way to achieve instant diversification, but sometimes, this can also be a drawback. Some funds commonly hold 200-300 stocks, while the larger funds can hold as many as 1,200. This approach feels a bit watered down to me, I prefer a mutual fund that takes a more targeted approach to the market, focused on a few key players in a few key segments.
This energy fund that I uncovered does just that, holding a plucky 36 stocks in key areas of the energy channel. Put ’em all together and you have a targeted yet balanced approach to the energy market.
AIM Energy Inv (FSTEX)
Here is a breakdown of the fund’s strategic allocations:
Production: Small-cappers that explore for and pump oil out of the ground. These stocks have a strong correlation to underlying crude prices with high beta. Expect volatility in the short-run, but the long-term trend is very bullish both fundamentally and technically.
Services: These are the specialty players who do things like drill in deep-ocean waters or provide maintenence services to the bigs. Weaker correlation to underlying crude prices, more stable cash flows than small-cap explorations.
Big Integrated: This is the most stable component of the fund. The bigger players that are more diversified, operating in production, refining and selling. Less volatility, functions to balance out against small cappers.
As you can see, this fund has crushed the S&P 500 over the last 10 years, take a look below.
10-Yr Chart-FSTEX vs. S&P 500
chart provided by Morningstar
