You Can Still Cash in on Black Gold's Relentless Rise

For indexers, there's a rich selection of low-cost, stock-based energy ETFs. Our favorites are the Energy Select SPDR ( XLE), which owns the 36 energy companies in Standard & Poor's 500-stock index, and iShares S&P Global Energy ( IXC), which owns many of the same firms but adds foreign stocks, such as BP and Brazil's Petrobras.

The funds perform similarly. The Energy SPDR returned an annualized 28% over the past three years and 30% over the past five to June 9, compared with 25% and 27% for the Global Energy fund. We like the SPDR's low annual expense ratio of 0.23%, but note that the portfolio is heavily concentrated in ExxonMobil, Chevron and ConocoPhillips (38% of the fund's holdings, combined). Global Energy's 0.48% expense ratio is less of a bargain, but the ETF provides a little more diversity. It owns shares of 74 companies, about half of them based outside the U.S.

Several mutual funds are also worth considering. Vanguard Energy ( VGENX) holds many of the global industry giants that the indexes own, but in much smaller concentrations. The fund also provides exposure to coal stocks, which are hard to find in the oil-and-gas-dominated indexes, as well as a smattering of utilities. It returned 33% over the past year and an annualized 34% over the past five years.

T. Rowe Price New Era calls itself a natural-resources fund, so it can stray outside of the energy arena. For example, it owns Barrick Gold, a gold-mining firm, and mining-equipment makers, such as Joy Global. But longtime manager Charles Ober keeps most of its assets in energy and does a good job beating the energy indexes, with below-average volatility. The fund ( PRNEX) gained 34% over the past year and an annualized 31% over five years.

For an off-the-beaten-path approach to energy investing, consider an alternative-energy fund. These funds invest in nascent technologies, such as solar energy and wind power, that should become more appealing as fossil-fuel prices and concerns about global warming rise. The year-old Market Vectors Global Alternative Energy ETF ( GEX) tracks 30 of these companies, focusing on those that have the highest market value and trading volume. The fund gained 30% over the past year, but its returns are susceptible to big swings.

Another way to play energy is with a closed-end fund, which issues a limited number of shares that trade like stocks on an exchange. BlackRock Global Energy and Resources Trust ( BGR) is one of our favorites. It owns mostly midsize and large energy companies and currently has a big stake in coal stocks (see Great Stock Funds on Sale).

In mid June, the fund traded at a 15% discount to the value of its assets. Investors can profit if the discount narrows or if the value of its assets rise. In the past year to June 2, the fund's assets returned 32%.

If you prefer individual stocks, ExxonMobil ( XOM) should be on your buy list. Size and resources make a big difference in the energy industry, and there isn't another nongovernmental energy firm that comes close to Exxon on either count. At $89, the shares recently traded at a reasonable ten times estimated 2008 earnings of $8.86 per share.