Yahoo Finance Oil ETFs: 8 Ways to Invest in Black Gold
Buying oil with ETFs.
Oil investing isn't easy. If you believe in a company's potential, you can easily invest directly by purchasing stock through a brokerage account or IRA. The most direct way to invest in oil, however, is futures, which can be far more volatile than stocks, and typically requires a lot more money to buy in. Thankfully, exchange-traded funds can help bridge the gap. While they're far from perfect, one-for-one investments in oil, they provide investors with easy-to-purchase access to gains in black gold.
United States Oil Fund LP (USO)
At roughly $3 billion in assets under management, the USO is easily the largest ETF that's directly tied to oil. In this case, USO attempts to track the spot price of West Texas Intermediate oil -- a light, sweet crude oil delivered to Cushing, Oklahoma. It does so by investing in crude oil and oil-related futures contracts, forwards and swaps as a way to track the spot price. While USO is a popular proxy, its returns can be hampered by a phenomenon known as "contango," in which it's forced to sell current-month contracts for less than the worth of the next-month contracts it has to buy.
Expenses: 0.45 percent, or $45 annually for every $10,000 invested.
United States 12-Month Oil Fund (USL)
Like USO, USL is an investment in West Texas Intermediate light, sweet crude oil that uses futures contracts based on delivery to Cushing. However, instead of just investing in near-month futures like USO, USL invests in near-month futures, as well as futures from the next 11 months down the road, too. Why bother? By investing in 12 months' worth of contracts, USL significantly minimizes the effects of contango. As a result, USL has outperformed USO in every year since its inception.
Expenses: 0.6 percent
PowerShares DB Oil Fund (DBO)
The DBO is another way to battle the evils of contango. This PowerShares fund invests in a single month's WTI oil contract -- but instead of automatically rolling over into the next-month contract like USO, it instead can roll over into any futures contract within the next 13 months. This not only helps minimize contango, but it allows DBO to take advantage of "backwardation" -- essentially the opposite situation as contango, in which you gain from rolling over, selling more expensive expiring contracts for cheaper futures contracts.
Expenses: 0.78 percent (includes 3-basis-point estimated futures brokerage fee)
iPath S&P GSCI Crude Oil Total Return Index ETN (OIL)
OIL isn't actually an exchange-traded fund, but an exchange-traded note. Unlike an ETF, which actually holds something tangible, such as stocks or futures, an ETN is a basket of debt securities issued by a bank used to pay a return that mimics some sort of index. In this case, OIL mimics an investment in WTI futures, so you're still tracking oil. As a note, you still face contango risk -- and because OIL is an ETN, your investment also would be in jeopardy if the creditor -- Barclays (BCS) -- were to go under. On the (small) plus size, returns include interest from investment in some T-bills.
Expenses: 0.75 percent
iPath Pure Beta Crude Oil ETN (OLEM)
The inclusion of additional futures contracts helps USL's returns dominate USO, and you see the same effect when it comes to OLEM versus its iPath brother, OIL. Whereas OIL merely tracks an investment in near-month contracts, OLEM's index allows for rolling into futures contracts across a number of future months, which helps mitigate the effects of contango. Again, OLEM has outperformed OIL every year since inception in 2012. The downside to OLEM is thin volume of just a few thousand shares per day, and a mere $25 million or so in assets under management.
Expenses: 0.75 percent
United States Brent Oil Fund LP (BNO)
If you prefer something a little less "sweet," the DBO provides access to near-month futures in Brent oil -- a type of oil that's taken from the North Sea and is both heavier (higher density to water) and less sweet (higher sulfur content) than WTI. The lighter and sweeter the crude, the easier it is to process, so WTI often is the favored type of oil, but supply-and-demand forces (such as growing stockpiles of U.S. oil pressuring WTI prices) means Brent can trade at a premium. That has been the case in 2016, with BNO outperforming USO 9 percent to -8 percent.
Expenses: 0.75 percent
VelocityShares 3x Long Crude Oil ETN/3x Inverse Crude Oil ETN (UWTI/DWTI)
These volatile funds aren't for inexperienced traders. The UWTI provides 3x the daily returns of the S&P GSCI Crude Oil Index, while DWTI provides 3x short exposure. And that "daily" aspect is important to note, because the longer you hold one of these funds, the more their performance "wiggles" away from the benchmark. To wit, the aforementioned index is off 7 percent, but UWTI is off a whopping 48 percent -- a loss of nearly 7x!
Expenses: 1.35 percent
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