Think gas prices will remain high or go higher? I do.  Demand is growing. Gasoline consumption is up 2% in the U.S. this year. China, India and the other new economies crave energy.  Ask yourself this: Are you plugging more stuff into the wall each year? Political instability in Nigeria, Iran, and Venezuela could limit supply. And, there’s only so much oil (natural gas and coal) in the ground. I’m not suggesting we’ll run out but it will become more expensive to extract it.

 

How can you benefit from higher energy prices? By investing in energy companies. There are two ways to do this. You can buy a Natural Resources sector fund or you can buy a Value fund which holds energy stocks. The sector mutual fund is the “pure play.” It holds energy stocks and, probably, stocks of minerals i.e., iron ore and copper, mining companies. The risk with a sector fund is that there aren’t a lot of them to choose from and they aren’t diversified. Don’t get me wrong. A sector fund is diversified within its focus area, i.e., owns a number of energy and mining companies, but any fund which investors in only one part of the economy is inherently riskier then a broadly diversified mutual fund. The other way to “play energy” is through a large cap or mid cap value fund. These funds typically have some energy exposure. The downside of this approach is that value mutual funds have only a portion of their assets invested in energy stocks.

 

With either a Natural Resource fund or a Value fund (or any fund, for that matter), don’t just go by the name. Check the fund’s holdings to see if they match your expectations. Different fund managers view and approach their mandates differently. You can find a list of the top rated Natural Resource and Value funds and their top holdings at MUTUALdecision. You can drill down (no pun intended) further by going to the fund’s website for a complete list of its holdings.

 

Which investing approach is right for you? It depends upon how much risk you’re willing to take and how your other assets are invested (think diversification of your entire portfolio). Having an energy investment might ease the pain the next time you fill up.