Oil ETFs - How to Trade Oil in the Stock Market
Oil ETFs - How to Trade Oil in the Stock Market
Oil is referred to by many names: black gold, Texas tea. It rightly occupies a key position in the real economy and in various derivative assets. Crude oil production fluctuates around 100 million barrels per day, and this entire volume is purchased. With a price of $65-70 per barrel and known production rates, it is easy to estimate the enormous amounts of money circulating in this market. According to statistics, more money is spent on oil in the global economy than on other commodities, such as gold, various ores, and raw materials.
One of the notable characteristics of oil is its significant price changes—volatility. For example, from October to December 2018, the price dropped by 40%. Such fluctuations can lead to the loss of substantial investments.
Chart - price on the Brent oil 2007-2019, USD/Brent crude oil
Trading Oil
You can view oil prices online at tradingview.com or through trading platforms like Thinkorswim.
Many traders and analysts believe that oil is a highly manipulative asset, with its price explained by fundamental factors, such as reserves or oil processing data, only in hindsight.
Given its high volatility, oil is well-suited for speculation.
When a trader becomes interested in this asset, they often start by exploring futures or CFDs on oil.
Oil can also be traded on the U.S. stock market, where the largest specialized oil exchange-traded funds (ETFs) are traded. These ETFs offer much broader variations and opportunities than the base asset.
Below, we will discuss the types of such funds and the specifics of trading them.
What is an Oil ETF?
Simply put, an ETF is a portfolio of assets from a specific sector or index purchased by a large fund. Assets can be acquired based on different principles, which we will explore below with examples. Funds charge a fee for the maintenance and management of ETFs, so this factor should not be overlooked when investing.
What Assets Can Be Included in Oil ETFs?
Oil ETFs can be divided into three main categories:
- Linked to Oil Prices: These primarily track oil prices. For example, the USA Oil Fund LP, which we will discuss below.
- Broad Market Funds: These may include energy companies involved in exploration, extraction, processing, transportation, servicing, and sales.
Sector-Specific Funds: These ETFs may include only stocks of companies engaged in oil and gas exploration and extraction. Another type focuses on oil refining companies, while others contain stocks of marketing companies selling oil products.
What Strategies Can Be Used to Trade Oil ETFs?
Investors have vast opportunities since an ETF is essentially a stock. Here are some example strategies:
- Hedging: The investor buys oil as the main asset and hedges risks with an ETF that rises when oil prices fall. Companies consuming gasoline or aviation fuel will grow as oil prices drop.
- Hedging via Selling Oil ETFs: The investor expects oil prices to rise and sells an oil ETF to reduce risks.
- Purchasing Inverse ETFs: This strategy is suitable for investors who want to profit from falling oil prices but are restricted by margin requirements or other limitations.
Top 10 Oil ETFs by Assets Under Management:
- Energy Select Sector SPDR Fund (Ticker: XLE)
- Assets under Management: $13.3 billion
- Expense Ratio: 0.15%
- Number of Stocks: 30
- Tracks: Energy reserves in the S&P 500
- Vanguard Energy ETF (Ticker: VDE)
- Assets under Management: $3.56 billion
- Expense Ratio: 0.12%
- Number of Stocks: 142
- Tracks: Performance of the U.S. energy sector
- SPDR S&P Oil & Gas Exploration & Production ETF (Ticker: XOP)
- Assets under Management: $2.3 billion
- Expense Ratio: 0.37%
- Number of Stocks: 69
- Tracks: Oil and gas companies in the U.S.
- United States Oil Fund LP (Ticker: USO)
- Assets under Management: $1.4 billion
- Expense Ratio: 0.79%
- Number of Stocks: 1
- Tracks: U.S. oil price index
- iShares Global Energy ETF (Ticker: IXC)
- Assets under Management: $1.5 billion
- Expense Ratio: 0.47%
- Number of Stocks: 72
- Tracks: Companies that extract and distribute oil and gas worldwide
- VanEck Vectors Oil Services ETF (Ticker: OIH)
- Assets under Management: $1.23 billion
- Expense Ratio: 0.37%
- Number of Stocks: 25
- Tracks: U.S.-listed companies providing oil services
- iShares U.S. Energy ETF (Ticker: IYE)
- Assets under Management: $865 million
- Expense Ratio: 0.48%
- Number of Stocks: 69
- Tracks: U.S. companies engaged in oil and gas extraction and distribution
- iShares North American Natural Resources (Ticker: IGE)
- Assets under Management: $789 million
- Expense Ratio: 0.46%
- Number of Stocks: 128
- Tracks: North American companies in natural resource extraction, including oil and gas, mining, and forestry
- Fidelity MSCI Energy Index ETF (Ticker: FENY)
- Assets under Management: $477 million
- Expense Ratio: 0.09%
- Number of Stocks: 138
- Tracks: Performance of the U.S. energy sector
- iShares U.S. Oil & Gas Exploration & Production ETF (Ticker: IEO)
- Assets under Management: $345 million
- Expense Ratio: 0.42%
- Number of Stocks: 66
- Tracks: U.S. companies involved in oil and gas exploration and distribution
Summary and Benefits of Oil ETFs:
- Trading is conducted on major exchanges and trading platforms.
- Sufficient liquidity, which is attractive for large capital.
- Taxes on profits are deferred until the fund is sold, significantly reducing costs.
- Diversification of assets reduces the likelihood of losses in any single asset.
- Protection against volatility, as ETFs include large companies that are less susceptible to sudden price swings.
- Trades like a regular stock, with various hedging options.
- Ability to trade both Long and Short with numerous strategies.