Oil ETF Investment

An Oil ETF can be profitable if you think the price of oil will go up. So if you are wondering, how to invest in Oil or what is the best way to invest in Oil, then ETFs could be just right for you.

Basically most oil ETFs will buy something called an Oil futures contract. This allows the fund to not have to own and store a huge tank of Oil (which could be very costly) and still benefit from the price fluctuations in oil.

Oil Long ETFs

There can be some advantages to getting into an ETF for Oil. Of course the world runs on oil, as the world becomes more and more dependent on Oil the demand increases. At the same time the world is running out of oil, so there could be some potential to profit here.

Here is a list of oil ETFs

There are some problems with oil ETFs however. They tend to buy future contracts for the commodity, this means in order to keep from having to own the commodity they must constantly sell their front month contracts and buy another contract in the future.

The problem here is that some contracts can get trapped into something called contango, in which Oil is trading for a higher price in a future contract then in the present contract. This causes the fund to own less and less of the commodity and thus perform worse than the commodity itself.

I previously wrote about how contango created an extreme change in the natural gas ETF UNG. So if you are looking for long term growth the best way to invest in oil is probably through an ETF that tracks the oil companies themselves like IEO or OIH and not the future contracts.

Of course these too would be affected by many other factors, such as how well the companies are managed. But it does tend to follow the actual price of oil closer then future contracts in the long term.

Investing Against Oil

You don’t have to be bullish on oil prices. There are many factors that might cause oil to go down in the future, for instance alternative energy might step up and kick oil off of the main stage. So, if you think oil will become a worthless liquid in the future you have two options.

You could short it causing you to take on unlimited risk, or you could invest into the oil short ETF DNO which is the inverse of USO as oil goes down it would theoretically go up. By investing into a short ETF you limit your risk while increasing your potential gain. In the future there will probably be many more short ETFs to choose from, but for now this the only one I know of.

Investing in oil can be a great way to diversify your portfolio, but make sure you have a game plan before entering it.

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