The term “oil ETF” refers to a kind of ETFs, which involves securities of companies in the oil and gas industries. An ETF, which stands for exchange-traded fund, in general means an accumulated cluster of securities (those might be stocks or bonds) which is traded on stock markets. It’s at the same time partially similar to a mutual fund and essentially different from it. An ETF and a mutual fund are both pooled securities, but an ETF, and an oil ETF as well, might be sold and purchased like a usual stock. A part of oil ETF is represented by commodity pools which provide limited partnership and not shares, and invest in derivatives.
Oil ETF main features
Oil and gas industries are often attractive for investors due to profits and returns associated with said spheres. But at the same time, investing in the mentioned industries usually requires a significant amount of equity allowable for investing, which is not always suitable for individual investors. Logistic challenges are also involved in investing in oil and gas, as in many cases it might be required to actually buy, store and transport said resources, which might be difficult in case of crude oil and gas.
Oil ETFs grant a possibility to invest in oil and gas to individual traders and companies, which don’t need to use the oil and gas in production but express a desire to gain profits from buying and selling these securities. As oil ETFs are traded like regular stocks, and daily changes of price are attributed to oil ETFs as well, which grants them a higher liquidity. It’s also worth noting that it’s common for oil ETFs to be charged with lower fees in comparison with mutual funds, thus providing one more advantage for investors.
Oil ETFs might monitor various things and not just a commodity, including indices, bonds, or groups of securities, focusing on a particular region or on companies from all over the world. Their benchmark targets also vary, with the most common cases being market indices of the company involved in the industry, or a price for raw materials.
An interesting version of ETFs, called inverse ETFs, also exist in the sphere of investing in oil and gas. Inverse ETFs direction is the opposite of those of their underlying securities.
It’s also important to remember that although the underlying indices are tracked rather closely, some differences are still likely to occur, especially if the observed time period is short.
Trading Oil ETFs
As oil and gas industries are highly popular and considered lucrative due to a heavy use of those materials in a wide variety of production spheres, oil ETFs trading is getting more and more into the spotlight. This tendency is likely to continue, as such a financial instrument appears to be convenient and profitable for many investors and traders. Still, it’s necessary to know that trading this kind of financial instruments might be complicated, as it involves understanding various important details of the industry. It’s also associated with many factors, which might be hard to predict because of their fluctuations and dependence on other related issues as well. So, tracking all details that are possibly involved might become a challenging process for an individual investor.
It’s also important to choose the oil ETFs an investor intends to buy after thorough studying and analysis of the available variants.
For the U.S., the most well-known and obtainable oil ETFs are the following:
- USO, which stands for United States Oil Fund and tracks the Benchmark Oil Futures Index;
- AMPL, or Alerian MLP ETF, investing in the Alerian MLP Infrastructure Index;
- VDE (Vanguard Energy ETF), which monitors the MSCI USA Investable Market Index;
- Energy Select Sector SPDR ETF, which is abbreviated as XLE, follows the Energy Select Sector Index.