What are the best oil ETFs to watch?
Crude oil has had a volatile 2020 so far. Find out how to get exposure to its price movements using oil ETFs here, and discover some top funds to get you started.
Oil ETFs: what you need to know
What are oil ETFs?
Oil exchange traded funds (ETFs) are ETFs that track the price movements of oil markets – usually either crude itself or stocks involved in oil and gas. They offer a way to invest in oil without buying and selling futures.
You can use oil ETFs to speculate on the price movements of a single market such as Brent, get exposure to a basket of commodities, or invest in a group of petroleum companies. Some even enable you to go short on an underlying index or offer leveraged returns.
Oil ETFs vs ETCs
There are two main types of oil ETF: commodity ETFs and exchange traded commodities (ETCs). Both track the price of their underlying assets, but they do so in different ways.
Commodity ETFs hold assets that enable them to track the price of their chosen index. The SPDR® S&P Oil & Gas Exploration & Production ETF, for example, aims to track the prices of oil and gas companies in the US – so it holds shares in those businesses. Other ETFs use futures or bonds to track WTI or Brent prices.
ETCs, on the other hand, use a debt instrument underwritten by a bank to track the price of one or more commodities. They use their holdings as collateral for the debt instrument. This makes them similar to exchange traded notes (ETNs).
Why invest in oil ETFs?
There are lots of reasons for investing in oil ETFs. Perhaps the most popular, though, is that it’s a more straightforward method of getting exposure to movements in oil prices than futures trading.
The vast majority of crude is bought and sold via futures. As well as being used by producers and refiners, futures exchanges are made up of thousands of speculators who try to profit from trading oil contracts – with no intention of taking delivery.
Futures exchanges have strict rules about who can trade on them, so they’re off limits to most retail traders. Even if you’re able to take part, it can be risky. In April 2020, futures traders sent the price of oil contracts briefly into the negative as they scrambled to sell before their contracts expired, which would have forced them to take ownership of thousands of barrels.
To buy and sell oil ETFs, you only need to open an account with a share trading provider. There are no rules about who can invest, and there are no expiry dates involved.
Opening a share trading account with IG takes minutes, and gives you access to thousands of global stocks and ETFs.
How else can I trade oil?
ETFs aren’t the only way of getting exposure to commodities, however. Derivatives such as CFDs enable you to trade directly on the price movements of commodities – including Brent, WTI, natural gas and more – as well as stocks, indices and currencies. You can even use CFDs to short oil prices to profit when the commodity’s in a bear market.
What moves oil markets?
Like any financial asset, oil markets are driven by supply and demand. If supply rises without a drop in demand, oil’s price will fall. Conversely, if supply drops or demand rises, its price will rise.
Despite the rise of alternative energy sources, the global economy is still dependent on crude. So boom periods usually see demand grow, while recessions see it drop.
A handful of countries are responsible for the majority of the world's oil supply, and the Organization of the Petroleum Exporting Countries (OPEC) has a major influence on production levels. However, two big producers – Russia and the US – sit outside of OPEC's jurisdiction. This can lead to price wars, which send supply soaring.
This situation can cause significant volatility in oil prices, which makes risk management an important factor in any strategy – regardless of whether you’re investing via ETFs or trading with CFDs.
The best oil ETFs to watch
- WisdomTree Brent Crude Oil
- United States Oil Fund, LP (USO)
- ProShares Ultra Bloomberg Crude Oil (UCO)
- ProShares UltraShort Bloomberg Crude Oil (SCO)
- Energy Select Sector SPDR® Fund (XLE)
- Invesco S&P SmallCap Energy ETF (PSCE)
These investments were chosen as examples of six different types of oil fund: a Brent oil ETF, a WTI fund, a leveraged oil ETF and a short oil ETF – plus funds that track large- and small-cap oil stocks.
Brent crude oil ETF: WisdomTree Brent Crude Oil (BRNT)
|Exchange: London Stock Exchange||12-month return: -61%*||Currency: USD|
The WisdomTree Brent Crude Oil ETC is designed to track the Bloomberg Brent Crude Subindex. It is collateralised by swaps, which are held with the Bank of New York Mellon.
Buying BRNT gives you exposure to movements in the price of Brent – one of the most popular oil benchmarks in the world, which is classed as oil drilled in North Sea fields.
BRNT posted a positive performance in 2019, but like most oil investments, it plummeted in the early months of 2020. Alongside BRNT, WisdomTree also manages a fund that tracks the price of Brent futures contracts with one-month expiries: OILB.
Crude oil (WTI) ETF: United States Oil Fund, LP (USO)
|Exchange: New York Stock Exchange (NYSE) Arca||12-month return: -82%*||Currency: USD|
The United States Oil Fund seeks to track the daily percentage price changes of light, sweet oil delivered to Cushing, Oklahoma – better known as West Texas Intermediate, or WTI.
WTI is the lightest, sweetest oil of the major benchmarks, meaning it has low sulfur and is of high quality. All WTI is produced in the US.
USO is a commodity ETF, so its holdings are intended to help it track the price of WTI. It mostly achieves this using futures contracts, although it also holds US Treasury bills.
Leveraged oil ETF: ProShares Ultra Bloomberg Crude Oil (UCO)
|Exchange: NYSE Arca||12-month return: -94%*||Currency: USD|
Leveraged oil ETFs are designed to multiply the performance of an underlying index. ProShares Ultra Bloomberg Crude Oil tracks the Bloomberg WTI Crude Oil index – but aims to double its daily movements. So if WTI gains 50 points in a single day, UCO should move up 100 points.
UCO uses futures contracts across the New York Mercantile Exchange (NYMEX) and Intercontinental Exchange (ICE) exchanges to track the price of WTI.
Short oil ETF: ProShares UltraShort Bloomberg Crude Oil (SCO)
|Exchange: NYSE Arca||12-month return: 227%*||Currency: USD|
The ProShares UltraShort Bloomberg Crude Oil, meanwhile, also offers leveraged exposure to WTI. But it’s an inverse ETF, which means it aims to move in the opposite direction. So if WTI gains 50 points in a single day, SCO should move down 100 points.
As an inverse ETF, SCO is a rare oil investment that has grown in price in recent months. Like UCO, it uses futures contracts to track its index.
Large-cap oil ETF: Energy Select Sector SPDR® Fund (XLE)
|Exchange: NYSE Arca||12-month return: -38%*||Currency: USD|
The Energy Select Sector fund is venerable in terms of ETFs – it was launched all the way back in 1998. It tracks the Energy Select Sector index, which includes large-cap companies across the US involved in oil and gas, as well as energy equipment.
Small-cap oil ETF: Invesco S&P SmallCap Energy ETF (PSCE)
|Exchange: Nasdaq||12-month return: -69%||Currency: USD|
Invesco’s S&P SmallCap Energy tracks the S&P SmallCap Energy index. It focuses on smaller energy companies that are listed in the US.
PSCE doesn’t only hold oil companies – 6% of its holdings are in Renewable Energy Group, for example. But it does offer exposure to lots of small-cap oil and gas companies, including SouthWestern Energy, Dril-Quip and Range Resources.
How to start trading oil ETFs
- Head over to IG Academy for a step-by-step guide to trading financial markets
- Open a live account and pick from thousands of global markets, including a range of oil ETFs
- Choose your trade and open your first position
If you want to trade on commodity prices, you can open a CFD trading account. CFDs enable you to go long and short on Brent, WTI, natural gas and more.
Alternatively, open a demo to try trading without risking any capital.
Oil ETFs summed up
- You can use oil ETFs to get exposure to movements in oil’s price – or invest in oil and gas companies
- There are a few different types available, including leveraged and short ETFs
- Oil supply and demand is variable, which often leads to volatility in the commodity’s price
- Create an IG account to take your position, or find out more about oil trading
* Correct as of 4 May 2020
This information has been prepared by IG, a trading name of IG Australia Pty Ltd. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.
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