The global energy sector has been growing without slowing down in the past century. The invention and vast introduction of varied energy sources have caused the immense popularity of the sector within investors, national governments, and private companies that want to expand their operations within the energy sector. Energy, including fossil fuels, has helped numerous countries to grow their economies and make them global leaders. Some of those would include the United States, Norway, and all of the countries in the Middle East. Natural oil and gas have benefited those nations with hundreds of billions of dollars, but the pattern is about to end.
Unlike a few decades ago, now the entire world faces a climate crisis. The temperature on earth is rising at an increasing rate, breaking records each and every year. Under such circumstances, the primary goal for any government is to reduce the carbon emissions, often caused by fuel-generated sectors. The social movement in efforts to stop climate change has also become significantly active over the past few years, resulting in vast global media attention.
So how did the change in the sector affect it financially? Many might think that the plummeting popularity of fossil fuel industries would hurt the energy sector as a whole. However, the truth is that it has boosted the investments in the industry whilst ensuring its future in a more sustainable environment throughout the decades to come. That is how the investment trust has soared in the sector, but many still prefer purchasing energy mutual funds over investing in green energy stocks. Why is this the case? Why do investors still put money in fossil fuels when the future of the sector is already known to be green?
The shift in the industry does not come overnight
The energy sector has witnessed a soaring rate of investments in green energy and renewables. Major companies that used to work in fossil fuels are now focusing solely on green sources. For instance, the leading Italian energy company Enel has changed its direction drastically. The company has always been heavily investing in renewable energy, but they are now planning to completely abandon fossil fuels. This major Italian company is now extending its horizons over to Asia, Africa, and the Americas. Enel’s example shows how much the sector is shifting toward green sources.
Private companies and enterprises are not the only ones that invest heavily in renewable energy sources. Rather, dozens of countries that have signed the Pris climate change agreement, or are independently committed to reducing emissions are turning towards renewables. Even some of the biggest oil-exporting nations, like those in the Middle East, are trying to diversify their economies, knowing, that oil exports will not manage to drive their economies in the future. For instance, the United Arab Emirates, the country that emerged from extreme poverty and became one of the richest nations on earth is investing in sectors like tourism, services, and transportation. On the other hand, this major oil exporter is building numerous vast solar and wind energy farms in efforts to substitute oil production in the future. Nevertheless, there is no illusion that nations like the United Arab Emirates and Saudi Arabia will go carbon neutral or significantly reduce oil production overnight.
Are mutual funds the best way to invest in energy?
But why are mutual funds still extremely popular within the energy sector? To find the answer to this question, we should look into how mutual funds work and what their benefits are. In simple words, mutual funds are packages of stocks from different companies that form a larger pool. Instead of buying individual company stocks, when investing in mutual funds, one purchases a part of the major fund that invests in numerous companies.
What benefits does the mutual fund bring to the investor? First of all, it reduces the risk of losing money as mutual fund investments tend to be much more stable. For instance, when someone invests in the S&P 500 mutual fund, they will most certainly benefit from a more than 9% return that the index has been generating over the past decades. On the other hand, if one invests in a particular company within the S&P 500, the chances are that the return will either be lower or possibly even negative at times.
The other crucial benefit is that the management of mutual funds is much easier. Acquiring stocks of different companies requires a firm knowledge of the sector and the ability to manage them. For someone who is not as aware, doing so could be quite a challenge. With mutual funds, the entity provides the portfolio manager and it is up to the person to make crucial financial decisions.
But why specifically is this relevant to the energy sector? Within this article, we have thoroughly discussed how the industry is transforming into a greener sector with a reduced carbon footprint and the potential rejection of fossil fuels. However, renewables, despite their extremely stable character, are not as profitable yet. Therefore, investing solely in the green energy sector, particularly experimental projects might not return as quickly and significantly. That is why mutual funds provide a mix of fossil companies with green aspirations and experimental, future-oriented renewable entities. This way, investors purchase safe, well-managed energy packages without having to worry about the future of their investments or the returns they will provide. This might change in the years to come as renewable energy becomes the leading niche of the sector. However, as of now, mutual funds are the best way to invest in the sector safely.