ETFs may offer growth despite oil price plunge

You don’t witness a 55 percent drop in oil prices without there being some genuinely negative repercussions for energy stocks. The collapse, which has been driven by a glut of oil in U.S. terminals and refineries, as well as the insistence of Saudi Arabia that it has no plans to cut production, could, for example, cause ExxonMobil’s profits to fall by more than half in 2015.

But this weakness in oil prices, and the resulting drop in energy company stock prices, can be a reason to go on the offensive rather than retreat. Carbon-based fuels are expected by some to continue to meet 75 percent of the world’s energy demands in 2040, and energy demand is expected to rise 35 percent by then, too. If you’re skittish about investing in energy stocks now, or aren’t confident you’ll pick the right ones, consider investing in the Energy Select Sector SPDR ETF (NYSE: XLE).

Exchange-traded funds, or ETFs, are a bit of a cross between mutual funds and stocks. The Energy Select one, for example, is an easy way to invest in about 43 oil-and-gas and service companies for an ultra-low annual fee – just 0.15 percent of assets. Not surprisingly, ExxonMobil and Chevron make up more than a quarter of total assets, resulting in strong cash flow and a recent dividend yield of 2.3 percent. (The Motley Fool recommends Chevron.)

Ask the Fool

Q: Where online can I find information on colleges and financial aid? – C.B., Taylorville, Illinois

A: For college planning and the college search, you might visit collegeboard.org, petersons.com, campustours.com and unigo.com.

For more financial aid guidance, start with the U.S. Department of Education at ed.gov and studentaid.ed.gov. (The latter’s page at studentaid.ed.gov/ resources#college-prep-and-pay is especially handy.) The finaid.org website offers scholarship and loan guidance and help filling out the Free Application for Federal Student Aid (FAFSA). (Don’t get intimidated by the FAFSA – filling it out is very important.) At fastweb.com, you can search a large scholarship database.

Q: What does a REIT’s “FFO” refer to? – R.N., Petal, Mississippi

A: First off, know that REIT stands for Real Estate Investment Trust. A REIT may look and act like an ordinary stock, but it’s a different kind of company, getting certain tax benefits and required to pay out at least 90 percent of its income as dividends. REITs typically own many properties, such as offices, laboratories, nursing homes, hotels, shopping centers or apartments.

With most companies, investors will examine net income, which reflects the profits left over from sales after all expenses have been subtracted. REITs are different, though. According to accounting rules, the value of REIT properties is decreased over time, with depreciation charged against and reducing net income.

In reality, however, real estate properties are probably not falling in value and may even be appreciating. So a REIT’s net income tends to understate its health. Thus, you should look at a REIT’s “funds from operation,” or FFO, instead. It ignores the effect of depreciation and other non-cash charges and gives you a truer picture of the REIT’s performance. Learn more about REITs at reit.com.

My smartest investment

One of my dumbest investment stories is intertwined with one of my wife’s smartest ones. Way back in 1973, I made the mistake of “telling” her to sign some papers so we could sell some of our stocks. Since I hadn’t discussed it with her before telling her to sign, she refused. Over the next bunch of years, I invested $35,000 in a lost cause, losing 95 percent of the money. We still held those unsold stocks, though, and they did very well. I’m still thanking my wife. – W., online

The Fool responds: It’s always best for couples to discuss their finances together, ideally making joint decisions. It’s also smart to not let one partner take care of all things financial without involving the other. The less-involved one should know where all the related papers and passwords are, in case they need to take over at some point.

Hanging on to stocks for many years is a great way to build big wealth, but you shouldn’t do so blindly. Check in on your holdings every quarter or so to make sure the companies are still performing well, with strong prospects.