A Guide to Oil and Gas Commodity ETFs and ETNs

by: SA Editors

Oil ETFs and ETNs

Unleveraged Oil and Gasoline ETFs and ETNs

  • iPath S&P GSCI Crude Oil Total Return Index ETN (NYSEARCA:OIL)
  • PowerShares DB Oil Fund ETF (NYSEARCA:DBO)
  • PowerShares DB Crude Oil Long ETN (NYSEARCA:OLO)
  • United States Gasoline Fund, LP ETF (NYSEARCA:UGA)
  • United States United States Heating Oil Fund, LP ETF (NYSEARCA:UHN)
  • United States Oil Fund, LP ETF (NYSEARCA:USO)
  • United States 12 Month Oil Fund, LP ETF (NYSEARCA:USL)

Leveraged Long Oil ETFs and ETNs

  • ProShares Ultra DJ-AIG Crude Oil ETF (NYSEARCA:UCO)

Short and Leveraged-short Oil ETFs and ETNs

  • PowerShares DB Crude Oil Short ETN (NYSEARCA:SZO)
  • PowerShares DB Crude Oil Double Short ETN (NYSEARCA:DTO)
  • ProShares UltraShort DJ-AIG Crude Oil ETF (NYSEARCA:SCO)
  • United States Short Oil Fund (NYSEARCA:DNO)

Natural Gas ETFs and ETNs

Unleveraged Natural Gas ETFs and ETNs

  • iPath DJ-AIG Natural Gas Total Return Sub-Index (NYSEARCA:GAZ)
  • United States 12 Month Natural Gas Fund (NYSEARCA:UNL)
  • United States Natural Gas Fund (NYSEARCA:UNG)

Mixed Oil and Gas ETFs and ETNs

Unleveraged Mixed Oil and Gas ETFs and ETNs

  • E-TRACS UBS Bloomberg CMCI Energy Index ETN (NYSEARCA:UBN)
  • ELEMENTS Rogers Intl Commodity Engy ETN (NYSEARCA:RJN)
  • iPath DJ-AIG Energy Subindex Total Return ETN (NYSEARCA:JJE)
  • PowerShares DB Energy Fund ETF (NYSEARCA:DBE)

What Are They?

  • The unleveraged ETFs (exchange traded funds) attempt to track the price of the commodity by holding the actual commodity in storage, or by purchasing futures contracts. Because futures provide leverage (more exposure than the actual cash invested), ETFs that use futures contracts have uninvested cash, which they usually park in interest-bearing government bonds. The interest on the bonds is used to cover the expenses of the ETF and to pay dividends to the holders.
  • The ETNs (exchange traded notes) are non-interest paying debt instruments whose price fluctuates (by contractual commitment) with the price of the commodity. In other words, with the ETN you don’t actually own the commodity, but a promissory note to pay you based on the commodity’s price. Because they are debt obligations, ETNs are subject to the solvency of the issuer.
  • The leveraged long ETFs and ETNs provide super-charged exposure to the commodity: if the goes up 3%, the leveraged ETF may rise 6% (and vica versa).
  • The short and leveraged-short ETFs and ETNs are a way to bet against the commodity price: if the price falls, the short or leveraged short ETF or ETN rises, and vica versa.

Why & How To Use Them

  • Commodities are a separate asset class from stocks and bonds, so they provide extra diversification in a portfolio.
  • The case for oil and gas: a hedge against inflation, and a play on economic growth, rising demand and future supply shortages.
  • The case against: In contrast to stocks and bonds, commodities are not income generating. So ownership of the ETFs or ETNs is a pure bet on prices. And the expenses charged by the ETF and ETN providers, including the cost of managing the futures, eat away at the underlying value of the fund. Morever, in the past, the price of oil and gas have underperformed the stock and bond markets for extended periods.

What to Look Out For

  • Long ETFs that use futures have diverged significantly from the price of the commodities themselves. ETNs, in contrast, track the price of the commodities closely. See the articles in the Further Reading section below.
  • There are dramatic differences in structure of the long ETFs and ETNs, even for the same commodity, leading to potential differences in performance and tax treatment.
  • Leveraged ETFs and ETNs are far riskier than simple long ETFs and ETNs. Their performance is often not what investors expect – see under Further Reading below.
  • ETFs and ETNs are treated differently for taxation purposes. Current opinion is that all gains on ETNs held for longer than one year are treated as long-term capital gains, whereas an investor owning a futures-based ETF is taxed on any capital gains on the underlying futures held by the fund using the taxation convention for futures, ie. at a hybrid rate of 60% long-term, 40% short-term each year on all gains, even if the investor doesn't sell the fund. (Check this carefully with your accountant.)

Further Reading

This page is part of The Seeking Alpha ETF Selector which sorts ETFs by type, highlights how to use them and what to look out for, and provides links to articles that discuss key issues for investors.