Defining what constitutes a fossil fuel is easy. Fossil fuels are fuels, as natural gas or oil, that are formed in geological formations on the remains of previously living organisms. Fortunately, it is even easier to invest in fossil fuels as that terminology is just another way of describing the traditional energy sector.
One of the most familiar avenues for gaining exposure to fossil fuel stocks is through oil names. The oil industry is home to an array of publicly traded companies that investors can use to start or add to the energy portions of their portfolios. Among the most familiar companies in this sector are large- and mega-cap integrated oil companies. Integrated oil firms explore for and produce oil and natural gas. These companies have refining and retail operations. Independent oil and natural gas production companies do not have refining or retail businesses.
As is the case with oil, investors have a few options for accessing natural gas. There are numerous natural gas producers that are publicly traded. Risk-tolerant investors can opt to tap natural gas investing through the futures market or through exchange traded funds that track natural gas futures contracts. Worth noting is that, because of significant declines in the price of natural gas since the 2008-2009 financial crisis, many companies that previously produced large amounts of gas are shifting production operations toward oil to capture larger profits.
Coal is another traditional fossil fuel. Investors that want exposure to multiple coal names at one time can choose the lone coal sector ETF. Regardless of how investors choose to get involved with coal equities, risks need to be acknowledged. First, coal stocks have been hurt by falling natural gas prices. Natural gas burns cleaner, and its lower prices have made the fuel more attractive to some electric utilities that previously used coal. Second, coal stocks are frequently moved by the demand of emerging markets. If demand is weak, coal stocks can be vulnerable to selling pressure.
Scores of mutual funds and ETFs are available with varying weights to fossil fuels investments. For example, some funds may allocate 60 percent of their weight to pure fossil fuels stocks, while others may have weights of 90 percent or more to these firms. Some of these funds focus more on the largest oil companies, while others offer a mix of large-, mid- and small-cap stocks. Other mutual funds and ETFs focus entirely on natural gas names while others are heavily tilted toward oil services stocks and refining companies.
Todd Shriber is a financial writer who started covering financial markets in 2000. He worked for three years with Bloomberg News and specializes in analysis of stocks, sectors and exchange-traded funds. Shriber has a Bachelor of Science in broadcast journalism from Texas Christian University.