Guide to Natural Gas Mutual Funds

Learn why you should include natural gas mutual funds in your portfolio. Get our current outlook on the sector and advice on how to choose the right funds.

Gain exposure to a growing industry while mitigating risk

For most investors, the best way to gain exposure to the growing demand for natural gas is through mutual funds. Buying shares in a fund mitigates the risk associated with picking individual stocks and doesn’t require the sophistication required to invest in natural gas futures, options on futures or exchange-traded funds and notes.

This guide is designed to help you understand why you should consider including natural gas mutual funds in your portfolio, how to choose the right natural gas mutual funds, and key trends in the market.

 

Why Include Natural Gas Mutual Funds in Your Portfolio

A strong case for investing in natural gas can be made based on several factors:

  • Growing demand for clean fossil fuels: United States electric power plants continue to switch from coal to natural gas, making natural gas the leading source of energy for the nation.

  • Vast domestic supply: The US is the largest producer of natural gas in the world and has enough natural gas to last 90-100 years assuming the same rate of production

.

  • Low cost of energy: Natural gas has a lower fuel cost than other fossil fuels and a lower cost to produce a British thermal unit (Btu) of energy.
  • Increase in US exports: The US is a leading exporter of natural gas and is expected to be the largest global exporter of liquefied natural gas by 2023.
  • Relative stability during volatile markets: While oil prices plummeted during the Covid-19 pandemic of 2020, natural gas prices held fairly steady. This is because utilities favor natural gas and strong residential demand for energy offset the lower demand from manufacturing and transportation.

For a deeper look at these and other trends, see our guide to Investing in Natural Gas

How to Choose Natural Gas Mutual Funds

Natural gas funds are made up of a portfolio of stocks of natural gas companies. They can cover a wide range of market caps and focus on particular areas of the industry such as:

  • Natural gas drilling companies
  • Diversified multi- and electric utility companies
  • Regulated, local natural gas distribution companies
  • Midstream pipeline and LNG exporting companies

Many companies operating in natural gas drilling also drill for crude oil and are therefore affected by negative trends in oil. Investors looking for the opportunity to benefit from the growing demand for natural gas while limiting exposure to negative trends in oil should seek out funds that focus on natural gas distribution.

Current Outlook for Natural Gas Mutual Funds

The Portfolio Managers of the Hennessy Gas Utility Fund discuss America’s role as a global supplier of natural gas, the Fund’s alternative energy exposure, earnings growth expectations, and how Utilities perform in a rising rate environment.

  • U.S. - Top LNG Exporter for the First Time in 2021

Natural gas utilities’ average EPS growth is expected to remain strong at 6-8% per year due to the growing importance of natural gas and its usage, an accommodative regulatory environment, and a continued large undertaking in pipeline replacement and modernization.

Read our latest commentary: Natural Gas Remains a Fuel of Choice.

Selecting Natural Gas Mutual Funds

We encourage investors to look at all available natural gas mutual funds to find the best funds that match their portfolio objectives. Hennessy offers the Hennessy Gas Utility Fund, a natural gas mutual fund.

Here are a few highlights of the Hennessy Gas Utility Fund:

  • Focus on Distribution: The fund invests in the distribution side of the natural gas industry. This provides exposure to the growing demand for natural gas while limiting exposure to negative trends affecting other energy companies.
  • Index-based Investment Methodology: The fund holds shares of publicly traded members of the American Gas Association (AGA) in approximately the same proportion as their weighting in the AGA Stock Index.
  • Steady Dividend Payouts: Due to their relatively stable revenue streams, we expect dividend payouts to remain steady for the vast majority of our portfolio companies. Further, companies in the fund have grown their dividend at about a 5% annual rate over the last five years.
  • Participation in Expansion of Renewable Energy: Many of the companies in the fund offer a diverse portfolio of energy solutions, providing not only natural gas but also renewable energy sources including solar, wind, and hydropower.
 
 

Frequently Asked Questions – Natural Gas Mutual Funds

These are the questions we often hear about investing in natural gas funds:

What is an energy fund?

Simply put, an energy fund is a mutual fund that invests primarily in energy companies. These funds will often focus on a particular sector such as natural gas or crude oil and focus on areas of that sector such as drilling, electric utilities or distribution.

How can investors seek to benefit from the growing demand for natural gas?

Investors looking for the opportunity to benefit from the growing demand for natural gas while limiting exposure to negative trends in oil should seek out funds that focus on natural gas distribution.

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The Funds' investment objectives, risks, charges, and expenses must be considered carefully before investing. The prospectus contains this and other important information about the investment company. Please read it carefully before investing. A hard copy of the prospectus can be requested by calling 1-800-966-4354.

Performance data quoted represents past performance; past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Current performance of the Fund may be lower or higher than the performance quoted and can be found here. Performance data current to the most recent month end may be obtained from HennessyFunds.com Hennessy Funds Standardized Performance

Neither forward earnings nor earnings growth is a measure of a fund’s future performance.

Mutual fund investing involves risk. Principal loss is possible. Current and future holdings are subject to risk. Small and medium-sized companies may have more limited liquidity and greater price volatility than larger companies. Investments in foreign securities may involve political, economic, and currency risks, greater volatility, and differences in accounting methods. The Focus, Total Return, Balanced, Large Cap Financial, Small Cap Financial, and Midstream Funds are considered non-diversified funds. A non-diversified fund, which may concentrate its assets in fewer individual holdings than a diversified fund, is more exposed to individual stock volatility than a diversified fund. A fund that concentrates its investments within one country, one sector, or a small group of industries, such as Japan, Technology, Financials, or Energy, may be subject to a higher degree of market risk. Investments in debt securities typically decrease in value when interest rates rise. The risk is greater for longer-term debt securities. Investments in lower-rated and non-rated securities present a greater risk of loss to principal and interest than higher-rated securities. Mortgage- and asset-backed securities are subject to prepayment risk, which is the risk that the borrower will prepay some or all of the principal owed to the issuer. Funds that invest in pooled investment vehicles (including ETFs) may experience higher fees. The formula-based strategy employed by some Funds may cause those Funds to buy or sell securities at times when it may not be advantageous.

ETFs are subject to additional risks that do not apply to conventional mutual funds, including the risks that the market price of an ETF’s shares may trade at a premium or discount to its net asset value, an active secondary trading market may not develop or be maintained, or trading may be halted by the exchange in which they trade, which may impact a Fund’s ability to sell its shares. Shares of any ETF are bought and sold at market price (not NAV) and are not individually redeemed from the Fund. Brokerage commissions will reduce returns.

ESG investing risk is the risk stemming from the Environmental, Social, and Governance factors that the Fund applies in selecting securities. The Fund intends to invest in companies with measurable high ESG ratings relative to their sector peers, and screen out particular companies that do not meet its ESG criteria. This may affect the Fund’s exposure to certain companies or industries and cause the Fund to forego certain investment opportunities. The Fund’s returns may be lower than other funds that do not seek to invest in companies based on ESG ratings. The Fund seeks to pursue its investment objective by using proprietary models that incorporate quantitative analysis. There is no guarantee that the Portfolio Managers’ use of these models will result in effective investment decisions for the Fund. From time to time, the Fund may concentrate its investments in one or more industry sectors. The Fund is currently substantially invested in the Consumer Discretionary and Health Care sectors and its performance is therefore tied closely to, and affected by, developments in these industries.

Master Limited Partnerships (MLPs) and MLP investments have unique characteristics. A Fund does not receive the same tax benefits as a direct investment in an MLP.

The prices of MLP units may fluctuate abruptly and trading volume may be low, making it difficult for a Fund to sell its units at a favorable price. MLP general partners have the power to take actions that adversely affect the interests of unit holders. Most MLPs do not pay U.S. federal income tax at the partnership level, but an adverse change in tax laws could result in MLPs being treated as corporations for federal income tax purposes, which could reduce or eliminate distributions paid by MLPs to the Fund. If the Energy Transition Fund’s MLP investments exceed 25% of its assets, it may not qualify for treatment as a regulated investment company (“RIC”) under the Internal Revenue Code (“Code”), and the Fund would be taxed as an ordinary corporation, which could substantially reduce its net assets and its distributions to shareholders. The Midstream Fund is treated as a regular corporation, or “C” corporation, for U.S. federal income tax purposes, and therefore, is subject to U.S. federal income tax on its taxable income at the graduated rates applicable to corporations (currently a maximum rate of 21%) as well as state and local income taxes. The Midstream Fund will not benefit from current favorable federal income tax rates on long-term capital gains, and Fund income and losses will not be passed on to shareholders. The Midstream Fund accrues deferred income taxes for future tax liabilities associated with the portion of MLP distributions considered to be a tax-deferred return of capital and for any net operating gains as well as capital appreciation of its investments. This deferred tax liability is reflected in the daily NAV, and as a result, the Fund’s after-tax performance could differ significantly from the underlying assets even if the pre-tax performance is closely tracked.

Glossary of Terms contains definitions and additional information.

To view the top 10 holdings of a Fund, please click the Fund name: Cornerstone Growth, Focus, Cornerstone Mid Cap 30, Cornerstone Large Growth, Cornerstone Value, Total Return, Equity and Income, Balanced, Energy Transition, Midstream, Gas Utility, Japan, Japan Small Cap, Large Cap Financial, Small Cap Financial, Technology. Fund holdings are subject to change and not recommendations to buy or sell any security.

Opinions expressed are subject to change at any time, are not guaranteed, and should not be considered investment advice.

News and Media Page:

To view the Morningstar ratings for the Japan Fund, please click here. (Media - TD Ameritrade)

To view the Morningstar ratings for the Focus Fund, please click here. (Media - CNBC-B. Macualey).

1 USD = 105.36 Yen as of 07/27/2020 (Media - Ticker - M. Takeda)

Tom White is a TD Ameritrade Network contributor and is not affiliated with the Hennessy Funds. Content is not investment advice, or a recommendation of any security, strategy, or account type. Options involve risks and are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses.(Media - TD Ameritrade-Rothberg)

To view the Morningstar ratings, please click here.

The Hennessy Funds are offered only to United States residents, and information on this web site is intended only for such persons. Nothing on this web site should be considered a solicitation to buy or an offer to sell shares of any Hennessy Fund in any jurisdiction where the offer or solicitation would be unlawful under the securities laws of such jurisdiction.

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