Best ETFs And ETNs To Play Oil Swings

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Includes: DBO, DNO, DTO, DWTI, OIL, SCO, UCO, USL, USO, UWTI
by: Nate Costello

Summary

When considering trading a certain ETF/ETN one must consider both the liquidity of the instrument, as well as the fees.

PowerShares DB Oil fund most closely matched the oil decline, with an error of only -0.99%.

The United States 12 Month Oil Fund performed 5.50% better than the prompt month oil, but is also tracking the 12-mo rolling strip, rather than the prompt month.

On the short side, DNO performed extraordinarily well, going up 93.62%, even though oil only declined -51.77%.

Oil ETFs/ETNs

While the most direct way to trade oil is to trade prompt month (nearest month to delivery), many investors prefer to stay away from futures for a multitude of reasons. Investors have a choice of several different oil ETFs to trade either long or short:

Selection of Oil ETFs/ETNs

Long

  • The United States Oil ETF, LP (NYSEARCA:USO)
  • ProShares Ultra Bloomberg Crude Oil ETF (NYSEARCA:UCO)
  • iPath S&P Crude Oil Total Return Index ETN (NYSEARCA:OIL)
  • VelocityShares 3x Long Crude Oil ETN (NYSEARCA:UWTI)
  • PowerShares DB Oil ETF (NYSE:DBO)
  • The United States 12 Month Oil ETF, LP (NYSEARCA:USL)

Short

  • ProShares UltraShort Bloomberg Crude Oil ETF (NYSEARCA:SCO)
  • VelocityShares 3x Inverse Crude Oil ETN (OTC:DWTI)
  • PowerShares DB Crude Oil Double Short ETN (NYSEARCA:DTO)
  • The United States Short Oil ETF, LP (NYSEARCA:DNO)

Factors to Consider Trading Oil ETFs/ETNs

When considering trading a certain ETF/ETN one must consider both the liquidity of the instrument, as well as the fees. It is important to consider the liquidity as one must look at a possible position size versus the average volume of the day. Additionally, as is the case with any ETF/ETN, an investor must consider the fees and how fees will impact any investor's returns. Shown below is a summary of the above oil funds (Source: ETF Database).

Lastly, one must look at when each individual fund rolls (for instance DNO next rolls from April 7-10) from the prompt month to the next month, and how this rolling impacts the price. Additionally, one must look to see when each fund is rebalanced and the impacts of the rebalance (for instance, tracking error when holding levered funds longer term).

Correlation to Rolling Prompt Month Oil's Performance

Performance of Long ETFs/ETNs

When trading an ETF/ETN, an investor hopes to match the movement of the underlying as closely as possible, in this case oil. Shown below are several long funds' performance from the past six months, from September 17 - March 16 (Source: Google Finance) and the performance of oil over the same period (Source: Investing.com).

So while the price of oil went from $92.81 on 9/17 --> $45.18 on 3/16, a decrease of -51.77%, the ETFs/ETNs did not move the same (below chart does not include levered ETFs, as they are for shorter term trading due to tracking error).

The PowerShares DB Oil fund most closely matched the oil decline, with an error of only -0.99%, while the iPath ETN decreased -6.60% more than the price of oil. Moreover, the United States 12 Month Oil Fund performed 5.50% better than the prompt month oil, but is also tracking the 12-mo rolling strip (the average price for the next 12 months), rather than the prompt month.

Performance of Short ETFs/ETNs

Most of the short funds weren't considered due to being leveraged (better for day and swing trading). However, the United States Short Oil Fund was considered and "is an exchange-traded security that is designed to inversely reflect the movements in the price of light, sweet crude oil."

Best Options for Trading/Investing

Short-Term

For short-term leveraged trading, there is no beating UWTI and UCO on the long side, and DWTI on the short side. These funds have the most liquidity for day traders and swing traders, and closely match oil movements over short periods of time.

Long-Term

Over the past six months, DBO would have been an investor's bet on going long oil (though the performance would have been terrible!), as it closely tracked oil, and only underperformed by -0.99% over 6 months. On the short side, DNO performed extraordinarily well, going up 93.62%, even though oil only declined -51.77%. This extra return was due to the rolling over that occurs with an ETF that tracks prompt month oil.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.