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Trading an Oil ETF


Crude oil can be traded as Exchange Traded Products (ETPs), a variant of Exchange Traded Funds (ETFs). Unlike an ETF that tracks an index, ETPs cannot be marketed as easily by financial intermediaries on a cross-border basis in Europe. But from a practical perspective, an oil ETP will trade like a normal share, and is intended to provide traders with oil price exposure without you having to buy oil futures.

One of the biggest ETPs in the US is USO, managed by Commodity Fund. With nearly $2 billion in assets and daily volume of $400 million, it is considered the flagship US oil ETF.

Unlike gold ETFs, an oil ETF will generally use front month futures to simulate the oil price, in an effort to get as close as possible to the spot oil price. However, this does mean that futures trading costs will eat into the fund’s performance over the medium term. Analysis against the oil price will show that the Oil ETF will begin to deviate. This is called ‘contango’.

Some oil ETFs are more intelligently managed, in that futures contracts are picked according to their likelihood to help the ETF match the spot oil price. Ultimately, it is very difficult to replicate the spot oil price over the long term. Increasingly, oil ETFs are being defined by the dates of the futures contracts they invest in – thus the investor knows what sort of time period of oil in the futures market that product is targeting. Examples include one month, all the way out to one year.

Investors in oil-based ETFs should also pay attention to the size and volume of the ETF they are considering. Some oil ETFs trade with relatively few assets invested. This may mean that they could be wound up by their provider if they are not seen to be commercially successful. Unlike shares, ETFs do charge fees, and fund managers are still in the business of making money. Lightly traded ETFs may be de-listed.

At time of writing, high volume oil ETFs in the US included United States Oil Fund (USO), Credit Suisse X-Links WTI Crude Oil ETN (OIIL), and ETRACS S&P GSCI Crude Oil Total Return (OILX). In Europe ETF Securities has long been considered one of the leaders in commodity ETFs, for example Daily Hedge Brent Crude or Daily Hedge WTI Crude Oil.

As with gold ETFs, another option is to buy ETFs that track the price of a basket of oil stocks. These will usually be based on an index that has been composed and calculated by a third party.

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This article does not constitute investment advice. Make sure you do your own research or consult a professional advisor.

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