The Definitive Oil ETF Guide: List of Oil ETFs and More

Direct investment in crude oil products used to be limited to major financial institutions and oil companies themselves, but the development of the ETF industry in the U.S. has democratized the investment process in many ways, including making investments in various oil products accessible to average investors. There are a number of exchange-traded products that offer exposure to prices of various types of oil utilizing an array of investment strategies. Whether you’re looking to bet on short-term movements in oil prices or hedge against skyrocketing prices, ETFs offer an efficient, cheap, and easy way to gain exposure to commodity prices.

How Oil ETFs Work

At a high level, oil ETFs function just like any other exchange-traded product: they track an underlying index. But unlike traditional equity ETFs that hold a basket of securities comprising the underlying indexes, most oil ETFs achieve exposure in a very different manner. Because physically buying and holding most oil and gas products is prohibitively expensive, oil ETFs instead generally invest in near-term futures contracts on the underlying commodity to gain exposure to prices. While this strategy may track spot prices fairly closely in certain environments, it may be way off in others [see also Brent Crude vs. WTI: The Best Performing Commodity].

If oil prices are in contango (longer term oil contracts are priced higher than near term ones), funds implementing this strategy will be continually rolling forward into more expensive contracts (see a more thorough discussion of this concept here). Other oil ETFs are structures as exchange-traded notes (ETNs), meaning that they actually own either the physical commodities or futures contracts, but are rather senior unsecured debt instruments issued by a financial institution that agrees to pay investors the return on a linked underlying index. The ETN structure reduces tracking error, but introduces investors to counterparty risk.

• USO: By far the most popular oil ETF, this fund offers exposure to front month WTI futures.
• BNO: This product has a similar strategy to USO, but instead offers exposure to Brent crude futures.
• DBO: DBO offers exposure to multiple WTI futures contracts in order to provide its exposure.
• OIL: This ETN invests in both WTI futures as well as short term Treasuries to offer one of the more unique methodologies in the space.
• USL: This ETF invests in 12 different WTI contracts at the same time in order to provide a longer term view on the commodity.
• OLEM: This ETN typically holds one WTI contract until it reaches its automated roll, when it can invest in any contract available; this may help mitigate contango issues.
• OLO: Similar to OIL, this fund invests in 3 month T-bills as well as WTI futures.
• OILZ: This product is specifically designed to combat contango by taking short positions in near term contracts and long positions in those that expire further out.
• CRUD: CRUD measures WTI by holding multiple futures contracts at the same time.
• TWTI: This product will either invest in WTI contracts or U.S. 3 month T-bills depending on a simple historical moving average.

Inverse and Leveraged Options

As is the case with most commodities, there are a variety of options for investors looking to gain leveraged or inverse exposure to oil prices through ETFs. Note that these funds can often be quite dangerous, so close monitoring and stop-loss orders are a must [see also 25 Ways To Invest In Crude Oil].

Indirect ETF Investment Options

There are some drawbacks to investing “directly” in oil through the ETFs mentioned above. Since these ETFs primarily use futures contracts, they don’t always track spot prices closely (in certain environments, there may be significant discrepancies between the return on a basket of futures contracts and the spot price for the underlying asset). Moreover, in certain environments, commodity prices can exhibit extreme volatility making them inappropriate for some investors [see also UNG vs. USO: Decoupling Or Correction?].

For those looking to benefit from increases in oil prices without investing in commodities, there are a variety of energy ETFs that hold stocks of companies engaged in the production and distribution of oil. Broad-based energy funds generally have significant allocations to oil companies (such as Exxon Mobil, Chevron, and ConocoPhillips), as well as providers of drilling and other services to the energy industry (such as Schlumberger).

Master Limited Partnerships (MLPs)

MLPs have become quite trendy in recent years as many investors have hopped aboard these assets to gain access to their sky-high yields. Oil-based MLPs are typically involved in the infrastructure of this commodity including pipelines and other means of transporting the fossil fuel. While they are an indirect play, their dividends may be too enticing to pass up.

Regulatory Environment

As oil ETFs have grown in size, some regulatory authorities have become concerned that the size of these funds is facilitating speculative behavior and contributing to overall market volatility. Most of the investigation and review on this subject has focused on natural gas futures contracts owned by UNG, but it is likely that any regulations would have an impact on all exchange-traded commodity products that utilize futures contracts to track prices. While the ultimate outcome remains to be seen, the most likely scenario is the implementation of position limits that prohibit a single fund from owning more than a predetermined number of contracts. Depending on the threshold determined, this could prevent commodity funds from expanding further, and may even force some to reduce their positions [see also Major Countries Burn Up Crude Reserves: Big Oil In Trouble?].

Oil ETF Price Movers

In the short term, predicting the factors likely to move the prices of oil ETFs is a daunting task. Given the presence of speculators in oil markets, as well as the impact of market news, short term prices can sometimes experience significant volatility. Over the long term, however, factors that impact oil prices are more clear, and include:

• OPEC Production Levels: The underlying investments of the ETFs in this ETFdb Category will be exposed to the decisions of this cartel on oil prices and production levels. If concerns over weak demand arise, OPEC may decide to cut production. If however oil-producing nations are looking to increase revenues, increases in supply could lead to lower prices.
• Alternative Energy Production: Demand for crude oil and natural gas will depend significantly on the development of alternative energy industries in coming decades. If solar energy and wind energy become viable sources of clean, renewable energy, demand for crude oil could diminish. If however, these industries continue to encounter obstacles on the road to sustainability, prices may continue to be propped up by dependence on oil.
• Geopolitical Tensions: With much of the world’s proven oil reserves located in the Persian Gulf, the level of world output depends in large part on the stability of an occasionally unstable region. In the event of disruptions in crude oil production, the operations of companies in the energy sector may be impaired.
• Natural Disasters: Generally unpredictable in nature, natural disasters, particularly hurricanes, can have a major impact on prices of oil and gas. Devastating storms usually result in significant output declines, months of recovery time, and extended reliance on alternative sources of energy.
• New Discoveries: In recent years, we have seen major discoveries of crude oil off the coast of Brazil and huge natural gas reserves near Louisiana. To the extent that major discoveries are made going forward, prices may decline in response to increased global supplies.

Further Reading on Oil ETFs

If you’re interested in oil ETFs, here’s some more advanced reading:

• Crude Oil Guide: Brent Vs. WTI, What’s The Difference?
• What Is Contango?
• USO vs. BNO: Explaining The Big Gaps In Oil ETF Performance

ETF Database is not an investment advisor, and any content published by ETF Database does not constitute individual investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. From time to time, issuers of exchange-traded products mentioned herein may place paid advertisements with ETF Database. All content on ETF Database is produced independently of any advertising relationships. Read the full disclaimer here.

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