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3 Funds to Buy as Energy Shares Rebound

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Energy shares have lately fallen out of favor. In fact, the broader energy sector declined in the first quarter of 2018 with the Energy Select Sector SPDR (XLE) down 9.5% over the last three months. However, oil prices stayed above $60 a barrel for most of Q1. Fresh concerns about possible supply bottlenecks pushed up oil prices and actually pared some of the losses for the energy sector in the first quarter.

During the fourth quarter of 2017, energy stocks posted the highest earnings growth among all the 11 sectors that make up the S&P 500. And this trend is expected to continue during the first quarter earnings season slated to begin shortly. It seems that following an extended period of relative weakness, energy stocks are finally on their way to recovery.

It is therefore the right time to consider these three energy mutual funds that would benefit significantly from a rebound in the energy sector.

Energy Stocks to Bounce Back

During the first quarter of 2018, the XLE, which represents energy shares included on the S&P 500, declined 6.6%. These losses came on the back of a 3.8% decline for 2017. However, energy stocks rebounded in December and January even as oil prices moved toward the $70 per barrel mark.

Moreover, a recovery seems to be occurring at this point. During March, the Energy Select Sector SPDR (XLE) gained 1.6% even as the S&P 500 lost 2.7% after major tech stocks suffered heavy losses.

The recent increase in oil prices is leading to the sector’s resurgence. Oil prices increased by 7.5% to $64.94 per barrel during the first quarter and are likely to sustain their momentum. Incidentally, oil prices have increased for six of the last seven months. Furthermore, experts believe that the recent uptick in oil prices and strong earnings results can help the sector make a comeback.

For the first quarter, energy sector earnings are expected to be up 60.8% from the same period last year on 15.7% higher revenues. Excluding the energy sector, total S&P 500 earnings growth is projected to drop from 15.8% a year ago to 14.4%. (Read: Handicapping the Q1 Earnings Season)

Global Oil Outlook Strong

The International Energy Agency (IEA) recently revised its global oil demand outlook upwardly to 99.3 mb/d for 2018. Venezuela, which has the world's largest proven oil reserves, has been registering a decline in crude production in recent years. IEA warned that Venezuela's situation is worse enough to send the oil market into deficit. Also, geopolitical risks in the Middle East, especially, the strained relationship between Saudi and Iran, can act as a key driver as more than half of the world’s oil reserves are located in this region.

3 Funds to Buy

Given such circumstances, we have highlighted three mutual funds that are poised to gain significantly from a rebound in energy shares. These funds also carry a Zacks Mutual Fund Rank #1 (Strong Buy). Moreover, these funds have encouraging three and five-year returns. Additionally, the minimum initial investment is within $5000.

We expect these funds to outperform their peers in the future. Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance, but also on the likely future success of the fund.

The question here is: why should investors consider mutual funds? Reduced transaction costs and diversification of portfolio without several commission charges that are associated with stock purchases are primarily why one should be parking money in mutual funds (read more: Mutual Funds: Advantages, Disadvantages, and How They Make Investors Money).

Vanguard Energy Investor (VGENX - Free Report) seeks capital appreciation for the long run. VGENX invests a major portion of its assets in equity securities of companies from the energy sector. The fund normally invests in stocks of companies that are engaged in the production, marketing, transmission and research of energy.

This Sector – Energy product has a history of positive total returns for over 10 years. Specifically, the fund has returned 0.6% over the three-year benchmark. To see how this fund performed compared to its category, and other #1 and 2 Ranked Mutual Funds, please click here.

VGENX has a Zacks Rank #2 and an annual expense ratio of 0.41%, which is below the category average of 1.37%.

Columbia Global Energy & Natural Resources Z  seeks capital growth for the long run. UMESX invests more than 80% of its assets in securities of domestic and foreign companies. The fund primarily focuses on acquiring securities of companies from the natural resources and energy industries. Moreover, UMESX invests more than half of its assets in petroleum and crude oil companies.

This Sector - Energy product has a history of positive total returns for over 10 years. Specifically, the fund has returned 1.3% over the three-year and 0.9% over the five-year benchmarks. To see how this fund performed compared to its category, and other #1 and 2 Ranked Mutual Funds, please click here.

UMESX has a Zacks Rank #1 and an annual expense ratio of 1.10%, which is below the category average of 1.40%.

Fidelity Advisor Energy I (FANIX - Free Report) seeks appreciation of capital in the long run. FANIX invests the lion’s share of its assets in the common stocks of companies operating in the field of conventional energy such as oil, gas, electricity and coal as well as non-conventional sources of energy, the likes of which include nuclear, geothermal, oil shale, and solar power.

This Sector - Energy product has a history of positive total returns for over 10 years. Specifically, the fund has returned 2.5% over the three-year and 1.1% over the five-year benchmarks. To see how this fund performed compared to its category, and other #1 and 2 Ranked Mutual Funds, please click here.

FANIX has a Zacks Rank #1 and an annual expense ratio of 0.80%, which is below the category average of 1.37%.

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