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Spotlight on Sector Funds: Investing in the Oil Patch
Soaring oil prices have buffeted financial markets for several quarters, while the spillover effects of dramatically higher prices for gasoline, home heating fuels and the like have been felt throughout the economy.
Many of the usual suspects are behind the spike in oil prices, including increased global demand—in the U.S., China, India and elsewhere, limited spare production capacity, and political turmoil in key oil producing regions. Meanwhile, some experts say, the tight supply-demand equation has raised concerns about an oil shortage, should a terrorist attack or some other major event disrupt production. So traders have bid crude prices up further to reflect this risk.¹
Not surprisingly, higher energy prices have largely translated into improved profitability for many of the major integrated oil companies, smaller exploration and production companies and oil services providers. And, some say, higher crude oil and natural gas prices, coupled with strong refining and wholesale marketing margins, are likely to strengthen industry profitability in the period ahead.
Though as we've seen historically, and again recently, energy prices can go down as well as up. Still, many investors who think higher fuel prices are on the horizon may be looking for ways to try to capitalize on their market view.
Buying individual energy stocks might provide one way to try to take advantage of market conditions. Another way to gain exposure to the oil patch: Sector mutual funds designed to capture the overall performance of the oil and gas industries by investing in a variety of energy stocks.
At ProFunds, there are 18 UltraSector ProFunds that correspond to distinct Dow Jones sector and industry indexes, including Oil & Gas UltraSector ProFund, which is benchmarked to the Dow Jones Oil & Gas sector index.
More Energy Exposure for your Investment Dollar
Many fund families offer sector funds, but UltraSector ProFunds are designed differently from many traditional sector funds:
- Magnified exposure. Oil & Gas UltraSector ProFund, like the other UltraSector ProFunds, seeks to provide magnified returns (gains, losses and volatility) equal to 1.5 times the return of its benchmark index. So, for example, if the Dow Jones Oil & Gas sector index rises 1% on a given day, Oil & Gas UltraSector ProFund should rise approximately 1.5% (before fees and expenses). Conversely, if the index falls by 1%, the fund should decline by about 1.5% (before fees and expenses).
- Magnified returns also mean you should get more oil and gas exposure for your investment dollar than with a traditional sector fund. So you either can invest a smaller amount to try to obtain the same sector or industry exposure, or invest the same amount to seek greater exposure.
- Indexed-based. Oil & Gas UltraSector ProFund, like the other UltraSector ProFunds, is designed to truly reflect its benchmark. Actively managed sector fund managers may overweight or underweight certain stocks in a portfolio. They may also invest a significant percentage of fund assets outside the sector. In contrast, UltraSector ProFunds are indexed, so there's no stock picking within or outside the sector—no relying on a manager's analysis.
- As you might expect, because sector funds are concentrated in narrow market segments, they can be more volatile and riskier than more diversified funds, and in themselves, don't constitute a complete investment program. So, for example, some investors may put a portion of their assets in Oil & Gas UltraSector ProFund, or another sector they think may outperform, to complement their core portfolio holdings.
- The flexibility to reallocate. Some fund families impose restrictions that make it harder to adjust your sector allocations. Not ProFunds. There are no restrictions on the frequency of exchanges among ProFunds and no upper limits on transaction size.
¹ Source: Chevron, ''Price and Supply: Why Do Gasoline Prices Rise and Fall?'', 4/8/2005.
Investing in UltraSector ProFunds involves certain risks, including in all or some cases, leverage, liquidity, concentration, non-diversification and repurchase agreement risks. These risks can increase volatility and decrease performance. Please see the prospectus for a more complete description of these risks. All ProFunds permit active investment strategies that can decrease performance and increase expenses.
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