4 ETFs For An Oil Rebound

Includes: BNO, UGA, UHN, USO
by: Tom Lydon

Oil prices have plunged the past week with crude futures dropping below $86 a barrel after touching $110 earlier this year. Contrarian investors, however, can consider oil ETFs for a rebound in energy prices.

Physical oil exposure provide investors as an added hedge and diversifier for a well-rounded investment portfolio. Currently, there are a number of ways to gain exposure to oil and other oil products through exchange traded funds.

To start off, most investors typically look at crude oil futures, specifically the West Texas Intermediate light, sweet crude, which is prized for its low-sulfur content.

The United States Oil Fund (NYSEARCA:USO) is the largest ETF that tracks WTI crude oil futures. USO holds near month contracts, so it is susceptible to potential headwinds when the fund rolls futures contracts upon maturity. USO has a 0.45% expense ratio.

"The catch is that the futures curve-the prices of contracts at progressively distant expiration dates-can take an upward slope (known as contango) or downward slope (known as backwardation)," according to Morningstar analyst Abraham Bailin.

If the later-dated contracts cost more than the spot price, or the market is in contango, futures-based ETFs may lose out when they roll to costlier later-dated contracts.

Investors can also gain exposure to Brent crude oil futures with the United States Brent Oil Fund (NYSEARCA:BNO). Brent crude, while also a type of sweet, light crude oil, contains less sulfur than its WTI counterpart, and this crude oil primarily comes out of the North Seas. BNO has a 0.75% expense ratio.

Additionally, ETF investors can choose from the oil related products, such as gasoline, natural gas and heating oil.

The United States Gasoline Fund (NYSEARCA:UGA) tracks the futures prices on unleaded gasoline. UGA has a 0.60% expense ratio.

The United States Heating Oil Fund (UHN) follows the daily changes in the spot price of heating oil. UHN has a 0.60% expense ratio.

Max Chen contributed to this article.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.