Crude oil is one of the most traded commodities in the world. It underpins modern industrial economies. We talked about trading Brent Crude oil - oil produced from the North Sea, in GMG's introduction to Brent Crude here, now we are going to look at crude ETFs.
Where can you buy Oil ETFs?
| Featured Broker | How can you invest? | What can you invest in? | How much does it cost? | More Info |
|---|---|---|---|---|
| General Account: SIPP: ISA: Derivatives: | UK Shares: US Shares: Funds: ETFs: | Account Fee: £0 Regular: £8 Discount: £3 US Shares: £0 | Open Account Your capital is at risk. | |
| General Account: SIPP: ISA: Derivatives: | UK Shares: US Shares: Funds: ETFs: | Account Fee: £0 Regular: £11.95 Discount: £5.95 US Shares: £11.95 | Open Account | |
 | General Account: SIPP: ISA: Derivatives: | UK Shares: US Shares: Funds: ETFs: | Account Fee: £0 Regular: £9.99 p/m Discount: £0 US Shares: £0 | Open Account |
 | General Account: SIPP: ISA: Derivatives: | UK Shares: US Shares: Funds: ETFs: | Account Fee: £0 Regular: 0.10% Discount: 0.05% US Shares: 2c per share | Open Account |
 | General Account: SIPP: ISA: Derivatives: | UK Shares: US Shares: Funds: ETFs: | Account Fee: 0.25% Regular: £9.95 Discount: £4.95 US Shares: £9.95 | More Info Capital at risk |
 | General Account: SIPP: ISA: Derivatives: | UK Shares: US Shares: Funds: ETFs: | Account Fee: £0 Regular: 0.05% Discount: 0.015% US Shares: 0.035% | Open Account |
 Interactive Investor | General Account: SIPP: ISA: Derivatives: | UK Shares: US Shares: Funds: ETFs: | Account Fee: £9.99 Regular: £7.99 Discount: £3.99 US Shares: £4.99 | Open Account |
 Fineco | General Account: SIPP: ISA: Derivatives: | UK Shares: US Shares: Funds: ETFs: | Account Fee: £0 Regular: £2.95 Discount: £2.95 US Shares: $3.95 | Open Account |
What, exactly, are oil ETFs?
ETF stands for exchange-traded fund. It is a fund with a specific mandate to track the price of crude oil (see GMG ETF Guide here).
The type of crude oil prices varies. In the US, most ETFs follow the West Texas Intermediate crude prices. WTI is a type of light sweet oil because of its low-sulfur content. Trading on WTI goes back a long way to the seventies. As WTI is highly popular it is used as the underlying price for NY Mercantile Exchange oil futures.
In other words, Oil ETFs are another way to gain exposure to crude oil price movements. A word of caution though. Oil ETFs are only suitable for trading and not really suitable for investment because of the rollover costs associated with its holdings. Let me explain below.
What are Oil ETFs?
There are many energy-related ETFs in the market. Crude oil is just one sub-sector. Many crude ETF are small-sized ETFs. According to etfdb.com, only one crude oil ETF exceeds $1 billion in asset under management (AUM, see below). This is the United States Oil Fund (USO), with $2.2 billion in assets. So if you wish to trade crude ETF, this would be the ultimate choice.
USO is listed in NYSE and anyone can buy and sell the ETF throughout a trading session. There are options associated with this ETF too. By and large, prices of most oil ETF will mimic that of WTI crude prices.
The largest Crude Oil ETFs to buy and trade
| USO | United States Oil Fund |
| UCO | ProShares Ultra Bloomberg Crude Oil |
| DBO | Invesco DB Oil Fund |
| UWT | VelocityShares 3x Long Crude Oil ETN |
| OIL | iPath Series B S&P GSCI Crude Oil Total Return Index ETN |
| DWT | VelocityShares 3x Inverse Crude Oil ETN |
| SCO | ProShares UltraShort Bloomberg Crude Oil |
| OILU | ProShares UltraPro 3x Crude Oil ETF |
| USL | United States 12 Month Oil Fund |
| DTO | DB Crude Oil Double Short ETN |
| OILD | ProShares UltraPro 3x Short Crude Oil ETF |
| OILK | ProShares K-1 Free Crude Oil Strategy ETF |
| WTIU | ProShares Daily 3x Long Crude ETN |
| DWTI | VelocityShares 3x Inverse Crude ETN |
| WTID | ProShares Daily 3x Inverse Crude ETN |
| OILX | ETRACS S&P GSCI Crude Oil Total Return Index ETN |
| OLEM | iPath Pure Beta Crude Oil ETN |
| UWTI | VelocityShares 3x Long Crude ETN |
Source: etfdb.com
Benefits and Risks of Oil ETFs
How does an ETF like USO move like the WTI price? This is because USO holds crude oil futures contract that is based on spot crude prices. According to USO's factsheet, its objective is:
... for daily changes in percentage terms of the shares’ net asset value (“NAV”) to reflect the daily changes in percentage terms of the spot price of light, sweet crude oil, as measured by the changes in price of the futures contract on light, sweet crude oil traded on the NYMEX that is the near month contract to expire, except when the near month contract is within two weeks of expiration, in which case it will be measured by the futures contract that is the next month contract to expire (the “Benchmark Oil Futures Contract”), less USO’s expenses.
Clearly, in buying USO investors can gain exposure to crude prices indirectly without holding crude oil futures. Over the short term, USO tend to track crude oil prices relatively well. For example, since the start of 2020 USO dropped from $13.2 to $4.8 (-63%) while WTI slumped from $61 to $22 (-63%).
The downside of holding futures is that futures contract expire. The need to keep rolling over to the nearest future contracts may incur costs. And more importantly, crude oil futures expire every month of the year. For example, on NYME-CME website, you can see where most crude oil futures are trading right now. May-2020: $22.63, Jun-2020 at $25.74 etc (see below). Trading is most active at the nearest month.
For USO, it will need to buy and hold the nearest contract and then switching over to the next contract (Jun-2020) after a few weeks.
Source: CME.com
Due to this cost, prices for USO tend to gravitate downwards over long periods of time. Look at USO's weekly price chart. Prices have failed to rebound much since the the 2009 lows - despite oil prices moving back up to $110 from $30 (see below).
This means that crude ETFs are excellent only for trading purposes.
Exotic Oil ETFs
USO is a so-called plain vanilla because it only tracks the underlying crude oil prices. There are some ETFs are
- geared or
- move inversely to the underlying oil prices.
There are known as 'exotic' ETFs. Some even combined both.
In the first table, note this ETF: Velocity Shares 3x Inverse Crude Oil (DWT). Not only does this ETF magnify the underlying crude prices, its prices moves inversely to crude. That it, it goes up when crude goes down (see DWT's factsheet here). Of course, this ETF is only meant for short-term trading. Look at its performance below:
