The Long and Short of Oil ETFs

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Includes: DBO, DNO, DTO, OIL, OLO, SCO, SZO, UCO, USL, USO
by: Tom Lydon

Oil-related ETFs have come and some have gone, with interest and popularity backing the ones still around while setbacks or disappointments struck others. Desipite the lack of physically-backed oil ETFs, investors may still choose from several futures-backed ETFs or exchange traded notes (ETNs).

Oil ETNs, like regular stocks, are taxed depending on short-term or long-term capital gains rates, with gains or losses taxed at 60% long-term and 40% short-term, writes Don Dion for TheStreet. An investor should also note that this investment vehicle is subject to the credit worthiness of the financial institute issuing the security. (Disclaimer: We aren’t tax experts, and you should consult your tax expert on tax issues concerning your investments.)

Another differing characteristic between the funds are the timing of the contract rolls. For example, United States Oil (NYSEARCA:USO) rolls contracts each month, whereas PowerShares DB Oil (NYSE:DBO) follows the Deutsche Bank Optimum Yield Index, which tries to minimize contango or maximize backwardation.

Investors seeking to invest long in oil may choose USO, DBO, United States 12 Month Oil (NYSEARCA:USL), iPath S&P GSCI Crude Oil TR Index ETN (NYSEARCA:OIL) or PowerShares DB Crude Oil Long ETN (NYSEARCA:OLO). As a result of contango in the oil futures markets, these funds have had disparate performances. OIL trades similarly to USO. DBO and OLO both track the Optimum Yield Index. USL uses a monthly roll strategy but holds the next 12 months of oil futures contracts, which reduces the cost of contango and makes the fund more similar to DBO.

After analyzing and comparing the various contangos each fund experienced, Dion concluded that potential oil ETF investors should choose to go long with DBO, then USL, or OLO as an ETN alternative. Over the short-term, USO and OIL may be a better pick for day traders since they both have a larger liquidity.

Additionally, there are the more sophisticated oil ETF tools.

Short oil.

  • PowerShares DB Crude Oil Short ETN (NYSEARCA:SZO). SZO does not use the Optimum Yield Index.
  • United States Short Oil (NYSEARCA:DNO). DNO shorts the near-month futures contract, and the fund has a higher volume than SZO.

Leveraged long. It should be noted that leveraged ETFs are subject to compounding errors and should only be used for short periods.

  • PowerShares DB Crude Oil Dble Long ETN (DXO).
  • ProShares Ultra DJ-UBS Crude Oil (NYSEARCA:UCO).

Leveraged short.

  • PowerShares DB Crude Oil Dble Short ETN (NYSEARCA:DTO). DTO resets monthly.
  • ProShares UltraShort DJ-UBS Crude Oil (NYSEARCA:SCO). SCO resets daily.

Max Chen contributed to this article.

Disclosure: None