How To Play Oil ETFs Now?

by: Zacks Funds

Oil prices continue to be volatile. Earlier this week, crude prices again dipped below $30 a barrel on worries about continuing supply glut and falling global demand. It seems very unlikely that leading oil producers like Saudi Arabia and Russia will be able to arrive at any agreement to cut production. Iran's re-entry into an already oversupplied market further complicates the situation.

Many investors have been shorting oil to profit from the continued slide in prices, but there are other investors who believe that this may be a great opportunity to invest in oil for the longer term. They believe that investing in oil at current levels is ultimately going to reap tremendous benefits when oil prices rebound eventually.

I believe that oil prices are going to stay lower for longer and this is not the time to go long on oil ETFs, but timing the oil market is not easy, and if you have a high risk tolerance and long-term investing horizon, then probably some time in the coming weeks or months you could start looking at oil ETFs. On the other hand, if you want to make some money from the crash in oil prices or want to hedge any energy position that you already have, then take a look at inverse oil ETPs.

Inverse Oil ETPs

Ticker Exposure Expense Ratio ETF or ETN Assets YTD Return
DWTI 3x Inverse Crude oil futures 1.35% ETN $393.27 mil 33.31%
DTO 2x a benchmark of crude oil futures contracts 0.75% ETN $150.76 mil 39.83%
SZO 1x inverse exposure to crude oil 0.75% ETN $22..14 mil 20.69%
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Investors should remember most inverse and leveraged ETFs are designed to provide their stated exposure for one day, and if used for longer than a day, their performance can vary greatly from their stated objectives due to compounding effects.

In very volatile markets, these ETFs could produce much worse than expected results. So, if you're buying them, make sure you understand the risks and monitor your portfolio daily.

For investors expecting an oil rebound, there are two main ways to play, either you can buy energy equity ETFs or you can invest in ETFs/ETNs that track commodity prices. In my view, energy equity ETFs are safer options for long-term investors.

Energy Equity ETFs

These ETFs are dominated by giants like Exxon (NYSE:XOM) and Chevron (NYSE:CVX), which are solid companies going through bad times.

Ticker Expense Ratio ETF or ETN Assets YTD Return
XLE 0.15% ETF $11.25 bil -5.11%
VDE 0.10% ETF $3.67 bil -5.2%
IYE 0.43% ETF $985.77 mil -5.0%
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Oil Commodity ETPs

ETFs/ETNs that bet on commodity prices using futures contracts are good at tracking commodity prices in the shorter term but perform much worse than the commodity in the longer term due to contango issues.

Ticker Expense Ratio ETF or ETN Assets YTD Return
USO 0.45% ETF $3.45 bil -17.10%
OIL 0.75% ETN $583.63 mil -21.5%
DBO 0.75% ETF $413.09 mil -16.7%
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Further, the United States Oil ETF is treated as a commodity pool and there are some tax issues associated with that structure that investors will need to understand. The other option is to invest in the iPath S&P GSCI Crude Oil Total Return Index ETN which is an ETN. But this ETN has had significant tracking issues of late.

In fact, the sponsor Barclays issued a notice urging people to "exercise extreme caution" when buying or selling ETNs that are trading at a premium over their underlying value.

Investors should make sure to check the previous day's closing indicative value on sponsor's website. They can also check the intraday indicative value on Yahoo Finance using the ticker for the ETN and adding "^" and "-IV" at the beginning and end. So, for OIL, the ticker for intraday indicative value is ^OIL-IV.

To learn more, please watch the short video below:

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