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The energy sector experienced intense price volatility in the first quarter of 2018.However, oil prices managed to stay above $60 a barrel for most of Q1. Concerns about possible supply bottlenecks pushed up oil prices and actually pared some of the losses for the energy sector in the first quarter.
Apart from rise in oil prices, there were no other visible catalysts that could keep the energy sector afloat. This resulted is sharp losses for mutual funds from the space. Therefore, this is the right time to dump energy mutual funds that failed to impress in Q1.
How Did Energy Sector Perform in Q1?
During the first quarter of 2018, the XLE, which represents energy stocks included on the S&P 500, declined 6.6%. These losses followed 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.
However, oil prices posted their third quarterly gain in a row, ending March 2017 up almost 8% year to date. The commodity got off to a strong start this year with the West Texas Intermediate (WTI) crude futures climbing 7.1% in January. Though the benchmark tumbled 4.8% in February in the wake of a broad stock market selloff, it staged a rebound in March, with the contract up 5.6% for the month.
For the first quarter, energy sector earnings are expected to be up 58.6% from the same period last year on 15.9% higher revenues. Excluding the energy sector, total S&P 500 earnings growth is projected to increase from 15.8% a year ago to 16.5%. (Read: Strong Start to Q1 Earnings Season)
5 Worst Energy Funds
We have highlighted five mutual funds that investors should steer clear of. Though these funds carry a Zacks Mutual Fund Rank #1 (Strong Buy) or #2 (Buy), they lost their sheen and fell in the negative zone during the first three months of 2018.
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.
VGENX has a Zacks Rank #1 and an annual expense ratio of 0.41%, which is below the category average of 1.36%. The fund has lost 2.4% in the last three months.
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.
UMESX has a Zacks Rank #1 and an annual expense ratio of 1.10%, which is below the category average of 1.39%. The fund has lost 4.6% in the last three months.
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.
FANIX has a Zacks Rank #1 and an annual expense ratio of 0.80%, which is below the category average of 1.37%. The fund has lost 4.6% in the last three months.
T. Rowe Price New Era Fund (PRNEX - Free Report) seeks to provide long-term capital appreciation by investing primarily in the common stocks of companies that own or develop natural resources and other basic commodities and in the stocks of selected non-resource growth companies.
PRNEX has a Zacks Rank #2 and an annual expense ratio of 0.69%, which is below the category average of 1.39%. The fund has lost 4.4% in the last three months.
Fidelity Select Energy Fund (FSENX - Free Report) seeks capital appreciation. FSENX normally invests at least 80% of assets in common stocks of companies principally engaged in the energy field, including the conventional areas of oil, gas, electricity, and coal, and newer sources of energy such as nuclear, geothermal, oil shale and solar power.
FSENX has a Zacks Rank #2 and an annual expense ratio of 0.78%, which is below the category average of 1.37%. The fund has lost 4.5% in the last three months.
Brighter Prospects for Energy
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.
What also catapulted oil prices are growing geopolitical concerns over tensions between major crude producers Iran and Saudi Arabia. Such tensions can act as a key driver as more than half of the world’s oil reserves are located in this region.
Finally, oil prices were also supported by the Federal Reserve’s decision to hike interest rates. As widely expected, the U.S. central bank opted to raise the benchmark lending rate to a range of 1.5% to 1.75%. Such an act led to a weakening of the U.S. dollar which in turn made crude, priced in dollars, more affordable abroad.
Moreover, the first quarter of the year saw the U.S. oil benchmark hitting its highest settlement since December 2014 despite record high domestic production. 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 would lead to the sector’s resurgence. Oil prices increased to $64.94 per barrel during the first quarter and are likely to sustain their momentum. Incidentally, oil prices have increased for the six of the last seven months.
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5 Worst-Performing Energy Mutual Funds of Q1
The energy sector experienced intense price volatility in the first quarter of 2018.However, oil prices managed to stay above $60 a barrel for most of Q1. Concerns about possible supply bottlenecks pushed up oil prices and actually pared some of the losses for the energy sector in the first quarter.
Apart from rise in oil prices, there were no other visible catalysts that could keep the energy sector afloat. This resulted is sharp losses for mutual funds from the space. Therefore, this is the right time to dump energy mutual funds that failed to impress in Q1.
How Did Energy Sector Perform in Q1?
During the first quarter of 2018, the XLE, which represents energy stocks included on the S&P 500, declined 6.6%. These losses followed 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.
However, oil prices posted their third quarterly gain in a row, ending March 2017 up almost 8% year to date. The commodity got off to a strong start this year with the West Texas Intermediate (WTI) crude futures climbing 7.1% in January. Though the benchmark tumbled 4.8% in February in the wake of a broad stock market selloff, it staged a rebound in March, with the contract up 5.6% for the month.
For the first quarter, energy sector earnings are expected to be up 58.6% from the same period last year on 15.9% higher revenues. Excluding the energy sector, total S&P 500 earnings growth is projected to increase from 15.8% a year ago to 16.5%. (Read: Strong Start to Q1 Earnings Season)
5 Worst Energy Funds
We have highlighted five mutual funds that investors should steer clear of. Though these funds carry a Zacks Mutual Fund Rank #1 (Strong Buy) or #2 (Buy), they lost their sheen and fell in the negative zone during the first three months of 2018.
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.
VGENX has a Zacks Rank #1 and an annual expense ratio of 0.41%, which is below the category average of 1.36%. The fund has lost 2.4% in the last three months.
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.
UMESX has a Zacks Rank #1 and an annual expense ratio of 1.10%, which is below the category average of 1.39%. The fund has lost 4.6% in the last three months.
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.
FANIX has a Zacks Rank #1 and an annual expense ratio of 0.80%, which is below the category average of 1.37%. The fund has lost 4.6% in the last three months.
T. Rowe Price New Era Fund (PRNEX - Free Report) seeks to provide long-term capital appreciation by investing primarily in the common stocks of companies that own or develop natural resources and other basic commodities and in the stocks of selected non-resource growth companies.
PRNEX has a Zacks Rank #2 and an annual expense ratio of 0.69%, which is below the category average of 1.39%. The fund has lost 4.4% in the last three months.
Fidelity Select Energy Fund (FSENX - Free Report) seeks capital appreciation. FSENX normally invests at least 80% of assets in common stocks of companies principally engaged in the energy field, including the conventional areas of oil, gas, electricity, and coal, and newer sources of energy such as nuclear, geothermal, oil shale and solar power.
FSENX has a Zacks Rank #2 and an annual expense ratio of 0.78%, which is below the category average of 1.37%. The fund has lost 4.5% in the last three months.
Brighter Prospects for Energy
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.
What also catapulted oil prices are growing geopolitical concerns over tensions between major crude producers Iran and Saudi Arabia. Such tensions can act as a key driver as more than half of the world’s oil reserves are located in this region.
Finally, oil prices were also supported by the Federal Reserve’s decision to hike interest rates. As widely expected, the U.S. central bank opted to raise the benchmark lending rate to a range of 1.5% to 1.75%. Such an act led to a weakening of the U.S. dollar which in turn made crude, priced in dollars, more affordable abroad.
Moreover, the first quarter of the year saw the U.S. oil benchmark hitting its highest settlement since December 2014 despite record high domestic production. 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 would lead to the sector’s resurgence. Oil prices increased to $64.94 per barrel during the first quarter and are likely to sustain their momentum. Incidentally, oil prices have increased for the six of the last seven months.
Want key mutual fund info delivered straight to your inbox?
Zacks' free Fund Newsletter will brief you on top news and analysis, as well as top-performing mutual funds, each week. Get it free >>