Crude Oil ETFs (exchange-traded funds) track the price changes of crude oil and are a great way for investors to diversify their retirement portfolio and gain exposure to the market. All of this is possible without the need of opening a futures account or buying a large number of different crude oil stocks.
Have Crude Oil Prices Bottomed?
Crude oil prices have been volatile since last summer. Thanks to increased supply of North American shale oil and weak economic data, crude oil prices fell roughly 25% from around $105.00 per barrel in June 2014 to $80.00 per barrel at the beginning of November.
That was just the beginning. Oil prices tanked in mid-November after the Organization of the Petroleum Exporting Countries (OPEC) announced it would not reduce its output. This thereby flooded the market with a product there was little demand for. Between November and the middle of March, crude oil prices fell another 47%.
Over a 10-month period, crude oil prices tumbled roughly 60% before bottoming near $42.00 per barrel. Since then, however, crude oil prices have experienced a bit of a renaissance. This, despite weak global economic data, increased supply and decreased demand. Currently trading near $60.00 per barrel, oil prices have climbed roughly 42% over the last eight weeks.
Is OPEC a Toothless Wonder?
Oil prices surged on Tuesday, May 12, after the U.S. Energy Information Administration (EIA) increased its 2015 global demand forecast by 190,000 barrels per day to 93.28 million bpd. (Source: eia.gov, May 12, 2015.)
Another report by the EIA showed production from seven key shale regions fell by 54,000 barrels per day in May. Shale is forecast to fall by 86,000 barrels per day in June. (Source: eia.gov, May 11, 2015.)
OPEC might not see oil hitting $100.00 per barrel, but it certainly wants higher prices. The cartel raised its 2015 forecast for oil demand by 50,000 barrels to 92.5 million barrels per day. (Source: arabnews.com, May 13, 2015.)
The fact of the matter is that oil prices are volatile, and will remain volatile; especially in this environment. OPEC might think it can control the global price of oil, but there are a lot of other factors at play.
The 3 Best Oil ETFs for 2015
Whether you’re a crude oil bear or bull, there’s an ETF out there to suit your needs. But, just like oil, not all ETFs are created equal. Some are new, volatile, and thinly traded. These kinds of crude oil ETFs are easy to get into but might be difficult to exit from—which is not a good position to be in.
Unlike the stock market where investors want to uncover hidden gems, with crude oil ETFs, you want to look for those that that have been in existence for a number of years, have solid daily volume, and are easy to buy and sell.
1. United States Oil ETF (NYSEArca: USO)
United States Oil ETF (NYSEArca: USO) is the most popular crude oil ETF, with a daily trading volume of 28.70 million shares. The fund has been in operation since April 2006 and has net assets of $2.77 billion. It also has an expense ratio of 0.45%; below the sector average of 0.80%. (Source: Unitedstatescommodityfunds.com, last accessed May 12, 2015.)
USO is actually a limited partnership, though it trades like a stock (and ETF). USO is better described as an exchange-traded security. It is designed to track the daily price movements of West Texas Intermediate (WTI) light, sweet crude oil delivered to Cushing, Oklahoma.
USO invests primarily in listed crude oil futures contracts and other oil-related futures contracts. It may also invest in forwards and swap contracts.
These investments will be collateralized by cash, cash equivalents, and U.S. government obligations with remaining maturities of two years or less.
Because USO tracks the daily price movements of WTI, shares have tumbled since last summer. That said, they have been on the rebound; currently trading at $20.75, USO’s share price has climbed 30% since mid-March.
2. ProShares Ultra Bloomberg Crude Oil (NYSEArca: UCO)
ProShares Ultra Bloomberg Crude Oil (NYSEArca: UCO) seeks daily investment results that correspond to two times (2x) the daily performance of the Bloomberg WTI Crude Oil Subindex. Due to the compounding of daily returns, returns over periods other than a day are likely to differ from the target return for the same period. (Source: Proshares.com, last accessed May 12, 2015.)
UCO began in November 2008 and has net assets of $1.0 billion with an expense ratio of 0.95%. UCO also has a daily volume of over 12 million shares. Because this ETF is leveraged at two times the daily performance, it can have a more volatile trading range. Trading near $9.96, UCO’s share price has soared more than 66% since the middle of March. Yet, UCO still has room to grow; it needs to climb more than 300% just to reach June 2014 levels of $40.00 per share.
3. United States Short Oil ETF (NYSEArca: DNO)
United States Short Oil ETF (NYSEArca: DNO) is an exchange-traded security that tracks the inverse movement of WTI light, sweet crude oil delivered to Cushing, Oklahoma. (Source: Unitedstatescommodityfunds.com, last accessed May 12, 2015.)
DNO invests primarily in listed crude oil futures contracts and other oil-related futures contracts, and may invest in forwards and swap contracts. These investments are collateralized by cash, cash equivalents, and U.S. government obligations with remaining maturities of two years or less.
The fund’s inception date was September 24, 2009. It has net assets of $17.43 million, and trades an average 34,348 shares per day. It also has an expense ratio of 0.60%, under the category average of 0.81%.
Because DNO moves inverse to the price of WTI, it has been performing very well since last summer. Between the beginning of June 2014 and the middle of March, the fund soared roughly 125%.
But because the price of WTI has rebounded over the last six weeks, the fund’s share price has been retreating. Currently trading near $49.10, DNO’s share price is down more than 26% since mid-March.