According to Morningstar, energy sector emerged as one of the best performers among the broad mutual fund categories in 2016. Despite the weak start, massive recovery witnessed in the second half of last year following OPEC’s decision to cut output and stabilizing global economy gave a significant boost to energy mutual funds last year. A brief look at the top performers in the category last year may be ideal in the current scenario.
Oil Price Movement in 2016
Energy sector went through a roller coaster ride last year to hit a 12-year low level in February and recovering from the same to hover above $50-per barrel mark. No sign of output control, boom in shale oil production and slowdown in major economies throughout the globe had negative impact on oil prices in the first half of 2016. The dramatic slide prompted several analysts to make bold calls on a potential bottom. While some suggested prices might drop as low as $20 a barrel, gloomier estimates called for a sensational $10-per-barrel floor. (
However, none of the above predictions came out to be correct as oil prices made a significant recovery thereafter. Oil prices logged in the biggest annual gains since the financial crisis with Brent and WTI rising 52% and 45%, respectively, primarily driven by the historic output cut deal that could end the two-year crude-oil rout and stabilize the oil market.
Historical Decision of Output Cut
The OPEC, which accounts for one-third of the global output, pledged to cap its oil production for the first time in eight years. The 14-member cartel is expected to reduce production by 1.2 million barrels per day. Saudi Arabia, the largest oil producer, will bear the brunt the most with a cut of almost 500,000 barrels per day.
Moreover, Iraq – which had previously resisted cuts, also agreed to curtail production by 200,000 barrels per day. This was followed by output reductions of 139,000 barrels per day for United Arab Emirates, 131,000 barrels per day for Kuwait and 95,000 barrels per day for Venezuela. Meanwhile, non-OPEC member Russia also decided to forego 300,000 barrels per day of oil output to prop up oil price. (
Read More) What to Expect in 2017?
The energy sector is expected to continue its positive run this year. In addition to the factors mentioned above, other factors are also expected to be in favor of the sector. Due to the two and a half year of downturn, producers worked tirelessly to cut costs down to a bare minimum and look for innovative ways to churn out more oil from rock. And they managed to do just that by improving drilling techniques and extracting favorable terms from the beleaguered service producers.
Meanwhile, lower capital expenditures, which resulted into cancellations of projects and production losses, will further help to control crude supply. Also, the deal by members of the OPEC oil cartel to cut output is expected to bring much needed stability to the market with prices set to improve steadily.
5 Best Performing Energy Funds of 2016
Given this backdrop, we have highlighted five energy mutual funds that carry either a Zacks Rank Mutual Fund Rank #1 (Strong Buy) or a #2 (Buy), and yielded strong returns last year.
Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify the 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 their likely future success.
In addition to encouraging returns last year, they also come with low expense ratios. The minimum initial investment is within $5000.
Fidelity Select Natural Gas FSNGX invests major portion of its assets in companies primarily involved in operations related to natural gas. FSNGX returned 77.2% over the last year. Annual expense ratio of 0.88% is significantly below the category average of 1.49%. FSNGX carries a Zacks Mutual Fund Rank #1. Fidelity Select Energy Service Portfolio ( FSESX Quick Quote FSESX - Free Report) invests lion’s share of its assets in securities of companies from the energy services domain. FSESX returned 63.7% over the last year. Annual expense ratio of 0.81% is significantly below the category average of 1.49%. FSESX carries a Zacks Mutual Fund Rank #2. Vanguard Energy Investor VGENX invests a large chunk of its assets in equity securities of companies from the energy sector. VGENX returned 48.9% over the last year. Annual expense ratio of 0.37% is significantly below the category average of 1.49%. VGENX carries a Zacks Mutual Fund Rank #1. Fidelity Select Natural Resources Portfolio FNARX invests heavily in companies primarily involved in owning or developing natural resources. FNARX returned 48.3% over the last year. Annual expense ratio of 0.85% is significantly below the category average of 1.49%. FNARX carries a Zacks Mutual Fund Rank #1. Oppenheimer SteelPath MLP Select 40 Y MLPTX allocates most of its assets in equity securities of master limited partnerships (MLPs). MLPTX returned 36.7% over the last year. Annual expense ratio of 0.87% is significantly below the category average of 1.66%. MLPTX carries a Zacks Mutual Fund Rank #2. About Zacks Mutual Fund Rank
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