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The Vanguard Energy Fund (VGENX 0.96%) invests in stocks, both U.S.-based and foreign, that operate in the energy industry. With a low expense ratio of 0.37% and a diversified, actively managed portfolio, the fund can be a smart way to play a rebound in oil prices without the guesswork of picking individual stocks.
What does the fund invest in?
The fund is actively managed, which means that the fund's managers research and select individual stocks, rather than simply tracking an index. As of June 30, 2016, the Vanguard Energy Fund holds 147 different energy stocks in its portfolio, the vast majority of which are engaged in various oil and gas operations. Here's a breakdown of the fund's current composition:
|
Industry |
% of Fund Assets |
|---|---|
|
Oil & Gas Exploration & Production |
39.8% |
|
Integrated Oil & Gas |
36.3% |
|
Oil & Gas Equipment & Services |
7.9% |
|
Oil & Gas Refining & Marketing |
5.8% |
|
Oil & Gas Storage & Transportation |
4.8% |
|
Utilities |
2.2% |
|
Oil & Gas Drilling |
1.8% |
Data Source: Vanguard. Percentages don't add up to 100%, because sectors with less than 1% of assets are excluded from this table.
Remember that the managers of actively managed mutual funds don't necessarily have to invest in the biggest companies or allocate a certain percentage of the portfolio in any specific way. For example, 19.2% of the MSCI ACWI index is invested in oil exploration and production, while the Vanguard Energy Fund has more than double that exposure – most likely because the fund's managers feel there are great values in that subsector.
With that in mind, here are the fund's top 10 holdings, listed in order from largest to smallest weight in the portfolio. While the fund has 147 different stocks, these 10 companies make up 41% of the fund's asset value.
- ExxonMobil Corp.
- Pioneer Natural Resources Co.
- Chevron Corp.
- Royal Dutch Shell plc
- Schlumberger Ltd.
- EOG Resources, Inc.
- TOTAL SA
- EQT Corp.
- Newfield Exploration Co.
- BP plc
Consider the costs
Actively managed funds tend to cost more to invest in than index funds, simply because there are portfolio managers who need to be paid for their services. The Vanguard Energy Fund has an expense ratio of 0.37%, which means that for every $10,000 you have invested in the fund each year, you'll pay $37 in fees.
This is significantly lower than the fund's peer group. Vanguard claims its expense ratio is 75% lower than the average for similar funds, and a quick search shows that figure is plausible. Just to name one popular example, the Fidelity Select Energy Portfolio has an expense ratio of 0.80% -- more than double that of the Vanguard fund.
However, it's also worth mentioning that there are energy index funds with significantly lower expense ratios, including the Vanguard Energy ETF (VDE 1.22%), which has a 0.1% expense ratio and simply tracks an index of energy stocks. There is significant overlap in the portfolios of the actively and passively managed funds, so it's worth taking a closer look and considering both options.
Performance: Take it with a grain of salt
The entire energy sector has been crushed over the past couple of years as oil prices have remained low. Because of this, don't be discouraged by the dismal-looking performance figures of recent time periods. The best approach is to compare the performance of the Vanguard Energy Fund to that of the benchmark energy index.
|
Time period |
Vanguard Energy Fund annualized returns |
Spliced Energy Index (Benchmark) |
|---|---|---|
|
1 year |
(2.36%) |
(6.33%) |
|
3 years |
(2.28%) |
(3.78%) |
|
5 years |
(2.44%) |
(3.83%) |
|
10 years |
2.07% |
1.15% |
Data source: Vanguard.
The important takeaway is that in a tough and unpredictable environment for energy stocks, the fund has managed to beat the index over each time interval. And it's also important to mention that the fund's long-term annualized total return since its 1984 inception is 10.8%. This past decade has been an especially difficult one for the energy sector, but the Vanguard Energy Fund has done a good job of making the best of the situation.
Should you buy the fund or choose individual energy stocks?
As far as actively managed mutual funds that invest in the energy sector are concerned, the Vanguard Energy Fund is the best option. However, would you be better off buying the fund or simply buying shares of say, ExxonMobil, and saving yourself the fees?
There's certainly a case to be made for owning individual stocks instead of funds, and in the interest of full disclosure, I own five individual energy stocks and no energy-focused mutual funds in my own portfolio. But this is an approach I would suggest if and only if you have the time, desire, and knowledge to thoroughly research and analyze your own stocks.
If you don't have the time to pick stocks the right way, then the Vanguard Energy Fund is an excellent way to get into the energy sector while oil prices are still low, and have the hard work done for you.
