As you pay more for gas and heating oil, energy stocks and the funds that invest in them are enjoying a tremendous run, but financial professionals say you should consider the risks carefully before you load up on this hot sector.
On Wall Street, what goes up invariably must come down, which makes chasing performance a dangerous strategy – you might make the classic blunder of buying high and selling low. Sector funds are volatile in general, but few parts of the market are as volatile as energy, said Jack Brod, principal of asset management services at The Vanguard Group.
“It’s an investor behavioral trap that recent performance tends to attract a lot of attention, and clearly the energy sector has been providing extraordinary returns over the past several years,” Brod said. “We are just trying to encourage investors to be thoughtful about why they select funds.”
While Vanguard offers a range of specialty funds – including the Vanguard Energy Fund (VGENX), which has seen its share price rise more than 50 percent in the past year – they aren’t for everyone, Brod said. For most individual investors, it’s simpler and far less risky to build a diversified portfolio without them.
“Sector funds can be extremely volatile and can behave more like an individual stock than a fund,” Brod said. “They may have their place, but we recommend investors step back and take a look at their existing portfolios. They may not realize the stock funds they have may already have exposure to the energy sector.”
If you’ve held a broad market fund for more than a couple years, your energy stake has already been on the rise. The 29 energy stocks in the Standard &Poor’s 500 make up almost 10 percent of the cap-weighted index, up from 5.8 percent at the end of 2003. Energy stocks have historically accounted for about 8.28 percent of the index, according to S&P.
Year-to-date, the sector has surged almost 36 percent. That follows a rise of 28.77 percent last year and 22.4 percent in 2003.
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