Oil ETF definition
An oil ETF is a type of exchange traded fund (ETF) that offers a way of taking advantage of volatility in the price of oil. Different oil ETFs will do this in different ways – some might comprise of companies in the oil and gas industry, and some might invest in the commodity itself.
How do oil ETFs work?
Investing in an oil ETF is exactly the same as investing in any type of ETF. You choose the fund that best suits your needs, and buy a share in it. As the value of the assets that the ETF holds goes up or down, so does the value of your share.
Like with shares, most retail investors will buy and sell oil ETFs via a broker, because the exchanges they trade on have strict rules for who can trade on them.
Types of oil ETF
Some oil ETFs will aim to mirror the price of their oil index, often Brent crude or WTI, but other options are available as closely as possible, either by investing in oil directly, or via derivatives like futures and options. Many, though, will instead have a set of oil-related companies as their benchmark index.
Some oil ETFs offer different ways of investing in oil volatility: offering returns that move against oil’s price, are amplified, or that beat their benchmark index.
Leveraged oil ETFs
A leveraged oil ETF will aim to deliver amplified returns to its benchmark index. So a triple oil ETF, tracking the price of Brent crude for instance, will aim to triple any movement that Brent crude makes.
Inverse oil ETFs
An inverse oil ETF will aim to move in the opposite direction to its benchmark index. If the oil price drops by 5%, then an inverse oil ETF with spot oil as its benchmark would aim to increase in value by 5%.
Smart beta oil ETFs
Smart beta ETFs aim to outperform their benchmark index by taking other factors into account. For example, you could buy a smart beta oil ETF that hedges its oil exposure with unrelated assets, in an attempt to reduce risk.
Benefits of oil ETFs
The importance of oil to the global economy means that it has long been a popular asset among investors, and oil ETFs offer an attractive way of investing in oil without direct involvement in the futures or options markets. That, plus a comparatively low cost of entry and online availability, make oil ETFs much more accessible than other forms of investment.
You can find oil ETFs via our ETF screener.