With gas prices so high, people are looking to add oil securities to their portfolios. Oil ETFs offer a way to invest in oil without buying and selling futures.
There are lots of reasons for investing in oil ETFs. Perhaps the most popular, though, is that it’s a more straightforward method of getting exposure to movements in oil prices or in a cross-section of the energy sector. There is quite a bit you should know before you dive in. If you want to invest in Oil ETFs the right way, here is a quick guide that can help.
Getting Started with Oil ETFs - Quick Guide
- Research your Oil ETFs – Investors interested in hedging against inflation generally opt for Oil ETFs that hold futures contracts, whereas investors who are particularly bullish on Oil tend to also incorporate companies involved in the extraction and production of petroleum.
- Define your strategy – trading lets you speculate on the price movement; dealing lets you take direct ownership of the funds.
- Take your position – create an account with us to buy and trade in Oil ETFs.
What are oil ETFs?
Oil ETFs, or exchange-traded funds, are baskets of securities that either track the price of oil as a commodity or contain oil stocks. Oil ETFs give investors easy access to a commodity that’s difficult to own and store. But oil prices can swing drastically in either direction and can be closely correlated to global and geopolitical events, making it a complex and often risky investment.
You can use oil ETFs to speculate on the price movements of a single market such as Brent or WTI, get exposure to a basket of commodities, or invest in a group of petroleum companies. Some even enable you to go short on an underlying index or offer leveraged returns.
What is an oil ETN?
Oil ETNs, or exchange-traded notes, are similar to oil ETFs in that they are both traded on securities exchanges and can be bought and sold throughout the trading day, like stocks.
A major difference between ETFs and ETNs is that ETFs are investment companies registered by the U.S. Securities and Exchange Commission, and ETFs own the underlying assets that you, as an investor, own a part of. ETNs do not own an underlying portfolio of assets and instead are made up of unsecured debt obligations. ETNs are generally considered riskier investments than ETFs.
Most Popular Oil ETFs
These investments were chosen as examples of different types of oil funds: a Brent oil ETF, a WTI fund, leveraged oil ETFs and a short oil ETF – plus funds that track large-cap oil stocks. Keep in mind, the best-performing investment today may not be the best one next year — or even next week.
Crude oil (WTI) ETF: United States Oil Fund, LP (USO)
The United States Oil Fund (USO) seeks to track the daily percentage price changes of light, sweet oil delivered to Cushing, Oklahoma – better known as West Texas Intermediate, or WTI.
WTI is the lightest, sweetest oil of the major benchmarks, meaning it has low sulfur and is of high quality. All WTI is produced in the US.
USO is a commodity ETF, so its holdings are intended to help it track the price of WTI. It mostly achieves this using futures contracts, although it also holds US Treasury bills.
Leveraged oil ETF: ProShares Ultra Bloomberg Crude Oil (UCO)
Leveraged oil ETFs are designed to multiply the performance of an underlying index. ProShares Ultra Bloomberg Crude Oil tracks the Bloomberg WTI Crude Oil index – but aims to double its daily movements. So if WTI gains 50 points in a single day, UCO should move up 100 points.
UCO uses futures contracts across the New York Mercantile Exchange (NYMEX) and Intercontinental Exchange (ICE) exchanges to track the price of WTI.
Short oil ETF: ProShares UltraShort Bloomberg Crude Oil (SCO)
The ProShares UltraShort Bloomberg Crude Oil, meanwhile, also offers leveraged exposure to WTI. But it’s an inverse ETF, which means it aims to move in the opposite direction. So if WTI gains 50 points in a single day, SCO should move down 100 points.
As an inverse ETF, SCO is a rare oil investment that has grown in price in recent months. Like UCO, it uses futures contracts to track its index.
Large-cap oil ETF: Energy Select Sector SPDR® Fund (XLE)
The Energy Select Sector fund is venerable in terms of ETFs – it was launched all the way back in 1998. It tracks the Energy Select Sector index, which includes large-cap companies across the US involved in oil and gas, as well as energy equipment.
iShares Oil & Gas Exploration & Production ETF (IEO)
The iShares Oil & Gas Exploration & Production UCITS ETF invests in stocks with a focus on Energy, World. The dividends in the fund are reinvested (accumulating).
The total expense ratio amounts to 0.55% p.a. The fund replicates the performance of the underlying index by buying all the index constituents (full replication). The iShares Oil & Gas Exploration & Production UCITS ETF has 440m Euro assets under management. The ETF is older than 5 years and is domiciled in Ireland.
Direxion Daily S&P Oil & Gas Exp. & Prod. Bull 2X Shares (GUSH)
These leveraged ETFs seek a return that is 200% or -200% of the return of their benchmark index for a single day. The funds should not be expected to provide two times or negative two times the return of the benchmark’s cumulative return for periods greater than a day.
These funds track a commodity-related equity index, consisting of a basket of oil and gas-related stocks. They do not invest in physical commodities and should not be expected to directly track the price performance of oil and gas commodities.
Are Oil ETFs right for you?
If you can deal with volatility, investing in an oil ETF might be a suitable option. Investing in oil through the United States Oil Fund, which aims to track the price of oil directly can be one way for investors who want to try a more active investment strategy without getting directly into commodity and futures trading.
If you’re less willing to handle volatility, or simply prefer to avoid fossil fuels because of their negative impact on the environment, you’ll likely be better off with other investments.
Oil consumption is expected to increase in the short term: The U.S. government estimates that oil consumption will rise over the next few years, showing that demand for the commodity is still there. Many oil companies are blue-chip businesses with large dividends: Oil businesses tend to be long-established, stable companies. Investors who value dividends and stability may want to invest in those businesses. Investing and trading in Oil ETFs involves relatively low fees: The investors don't require any storage space as there is no physical delivery of the commodity, which makes them an attractive option for investors.
Renewable energy sources have been gaining market share for decades: Especially in recent years, climate change has become a concern for many people, leading to the rise of renewable energy and electric vehicles. Over time, this will likely reduce the demand for oil. Oil prices can be highly volatile: The price of oil can change quickly and without notice. Investors who can’t weather that volatility may want to avoid oil. Politics can complicate oil investments: While the United States produces a large amount of oil, other nations, including Russia, Saudi Arabia, and Iraq, are also major producers. Political tension between these major producers can lead to interruptions and uncertainty in the oil market, making it difficult to predict the direction of the market.
How to Invest in Oil ETFs
There are two routes to investing in oil ETFs: speculating on their prices using CFDs or buying the shares of funds in the hope they increase in value.
Trading Oil ETFs using CFDs
A CFD is a contract in which you agree to exchange the difference in the price of an asset from when you first open your position to when you close it. You are speculating on the price of the market rather than taking ownership of the stocks. If you open a long position and the stock or ETF does increase in value, you’ll make a profit, but if it falls in price, you’ll make a loss – the opposite is true for a short position.
Buying Oil ETFs
This means that you take ownership of a portion of the fund outright, with the intention of holding it with a brokerage and profiting if it increases in value.
Get Started with CAPEX.com
- Choose which type of account you want to use. Your first concern should be your risk appetite and time horizon. If you want to buy and hold oil ETFs, open an investing account. If you want to speculate on price movements (including falling prices) with zero commission and leverage, open a CFD trading account.
- Create an account. Regardless of your chosen account, you need to register and complete the KYC process to verify your identity.
- Fund your account with fiat money. Before buying and trading any oil stock, you need to fund your exchange account with U.S. dollars, Euros, or other currencies.
- Select your stocks. When selecting commodity ETFs, pay attention to factors like the fund’s performance, expense ratios, top holdings, and assets under management.
- Place a buy order for your chosen stock. Follow the steps required by the trading platform to submit and complete a buy order.
When trading stocks, the CFDs (contracts for difference) are stored in your account and are more liquid than the underlying asset. However, you should be aware that CFD trading is fast-moving and requires close monitoring. As a result, traders should be aware of the significant risks when trading CFDs. There are liquidity risks and margins you need to maintain; if you cannot cover reductions in values, your provider may close your position, and you'll have to meet the loss no matter what subsequently happens to the underlying asset.
Oil ETFs give investors an easy way to invest in oil or businesses involved in the oil industry. With oil demand expected to increase in the near future, these ETFs are a way for investors to profit from increased demand for fuel due to increased travel and production of goods after the pandemic.
Before you start investing and trading in oil stocks, you should consider using the educational resources we offer like CAPEX Academy or a demo trading account. CAPEX Academy has lots of free trading and investing courses for you to choose from, and they all tackle a different financial concept or process – like the basics of analyses – to help you to become a better trader or make more-informed investment decisions.
Our demo account is a suitable place for you to learn more about leveraged trading, and you’ll be able to get an intimate understanding of how CFDs work – as well as what it’s like to trade with leverage – before risking real capital. For this reason, a demo account with us is a great tool for investors who are looking to make a transition to leveraged trading.