Five Funds That Tap Energy's Potential

For those who buy the case that energy is a smart place to overweight in 2004, here are five ways to play the sector. One final caveat: Sector fund bets are best in smaller doses. A 5% to 10% allocation should suffice for more aggressive investors who feel comfortable making a sizable sector bet.

1. Vanguard Energy

The $2.1 billion (VGENX Quote)Vanguard Energy fund, managed by Karl Mandtel of subadviser Wellington Management, is a great way to tap energy's potential. Returns have been impressive over the short and long haul -- 11.01%-a-year average over three years, 12.43% a year over the 10 years -- besting three-quarters of its peers, according to Morningstar. Meanwhile, the actively managed fund is dirt cheap -- the 0.4% expense ratio is actually cheaper than some of the exchange-traded funds in the energy sector. Mandtel, who replaced longtime colleague Ernst von Metzsch at the helm in December 2002, focuses almost exclusively on energy stocks and applies a contrarian bent in hunting for out-of-favor stocks. ExxonMobil, BP(BP Quote), Total SA(TOT Quote) and other giant global diversified oil companies turn up prominently in the portfolio.

2. Jennison Natural Resources

(PNRZX Quote)Jennison Natural Resources isn't a pure energy fund. Skippers Leigh Goehring and Mark DeFranco dip into many natural resources pools -- metals, agriculture, forest products and, yes, energy, which the managers like enough currently to have the sector make up roughly two-thirds of the portfolio. While the $145 million fund's expense ratio of 1.39% is considerably higher than the Vanguard fund, it remains well below the 1.92% category average, according to Morningstar. Returns have been strong: The three-year average annual return of 16.57% ranks it in the top 20% of its class. Among the fund's biggest holdings are energy-services providers such as BJ Services(BJS Quote) and Smith International(SII Quote).