What is the Oil ETF?
The term “Oil ETF” refers to the exchange-traded fund (ETF) that invest in companies that are engaged in the oil and gas industry. The companies that are included in an Oil ETF basket are usually involved in the production, discovery, distribution well as retailing of oil and gas. Some of the ETFs invest in the stocks of the companies, some hold limited partnership interests in the firms and the rest invest in a pool of derivative contracts such as options and futures.
Explanation of Oil ETF
The purchase of Oil ETFs is a simple way for the investors to gain indirect exposure to the performance of oil commodity, without owning any physical oil per se. Basically, this either invest in company stocks or purchase futures, options, and other derivative contracts, which track the performance of oil as a commodity or indexes liked to oil. In other words, by buying these ETFs the investor purchases exposure to the price movement of oil without actually purchasing any physical barrels of oil. These ETFs are quite similar to mutual funds, with the major difference that the former can be traded on the exchange on a real-time basis just like any other equity stock.
Features of Oil ETF
Some of the main features are as follows:
- Unlike mutual funds, an Oil ETF can be traded on the exchange similar to any common stock.
- Most Oil ETFs charge fees that is relatively lower than that of mutual funds, which makes them an attractive option for investors.
- The investors don’t require any storage space as there is no physical delivery of the commodity.
- There is always a high demand for oil commodity among investors as it is a ubiquitous commodity in the global economy.
Examples of Oil ETF
It is important to note that the value of Oil ETFs have been severely impacted since 2014-15 owing to various supply factors and geo-political tensions resulting in declining performance. Now, with the above-mentioned fact in mind, let us look into some of the popular global ETFs that are available in the international market:
- United States Oil (USO): This fund falls under the category of US Fund Commodities and its investments are primarily focused on companies with a credit rating of AA or above. As of September 10, 2020, it’s total asset stood at $4.0 billion.During2019, the fund has been able to generate returns of 33.37%, which was one of the best performances in this category. However, the fund is down by 73.61% in YTD 2020. The fund’s adjusted expense ratio is 0.79%, which is relatively higher in its category.
- Vanguard Energy ETF (VDE): This fund falls under the category of US Fund Equity Energy and as the name suggests more than 97% of the fund is invested in the US. As of September 10, 2020, its total asset stood at $2.5 billion. During2019 and YTD 2020, the fund has been able to generate returns of 9.32% and -45.14% respectively. The fund’s adjusted expense ratio is 0.1%, which is relatively low.
- Alerian MLP ETF (AMLP): This fund falls under the category of US Fund Energy Limited Partnership and more than 99% of the fund is invested in the US. As of September 10, 2020, its total asset stood at $3.2 billion. During2019 and YTD 2020, the fund has been able to generate returns of 5.82% and -45.17% respectively. The fund’s adjusted expense ratio is 0.87%, which is on the higher side.
Types of Oil ETF
It can be broadly categorized under four major types. They are as follows:
- Leveraged Oil ETF: These type of funds are primarily focused on generating higher returns than the benchmark index while minimizing the chances and quantum of losses. ProShares Ultra Bloomberg Crude Oil (UCO) andProSharesUltraShort Bloomberg Crude Oil (SCO) are some of the examples of Leveraged Oil ETF.
- Inverse Oil ETF: These types of funds apply such an investment strategy that the value of the fund goes up when the price of oil falls. In other words, these funds generate returns when the oil price moves adversely. ProSharesUltraShort Bloomberg Crude Oil (SCO) also falls under the category of Inverse Oil ETF.
- Smart Beta Oil ETF: These type of funds don’t have any specific investment strategy, but their focus is to generate maximum returns by implementing smart unconventional tactics. As such, these funds are very risky and equally rewarding.
- Index ETF: These type funds are basically plain vanilla products that intend to mimic the performance of a basket of securities from varying product range.
Some of the major advantages are as follows:
- There is a high demand for crude oil as well as oil related derivatives contracts which results in high liquidity. In fact, even 5-year and 10-year contracts are fairly liquid in nature.
- Purchase ofOil ETF provide the best hedge for both retail and institutional investors having existing positions on oil commodity.
So, it can be seen that Oil ETF has economic importance given the status of the underlying commodity in the global economic and political scenario. Undoubtedly, oil industry is the always under the scanner of all investors and traders as it influences the performances of most capital intensive industries. Hence, Oil ETFs and derivative contracts are very popular among the investor community.
This is a guide to Oil ETF. Here we also discuss the introduction and types of oil ETF along with features and advantages. You may also have a look at the following articles to learn more –