3 ETFs to Play a Rebound in Oil Prices

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Oil prices are weakening again — during the past few months, WTI crude futures have fallen from $106 per barrel to about $94 per barrel, reaching seven-month lows. Brent, meanwhile, is sitting at 14-month lows.

oil prices uso dbe xle

Source: ©iStock.com/Zelfit

The dip in oil has created that fun dichotomy of ecstatic consumers glad to have some relief at the pump, and sour investors unhappy to see their energy holdings take a beating.

But might now might be a good time to go against the grain.

While oil prices might be low at the moment, the commodity has proven resilient over the years. Investors would be wise to remember that the U.S. economy remains healthy, as does China’s, which should help keep some sort of floor on prices. Longer-term, emerging economies should provide another source of strong demand.

According to Exxon Mobil’s (XOM) own estimates, global demand for oil is expected to increase 30% by 2040 — making it very difficult to believe oil is heading into the cellar for any long amount of time.

True, oil prices aren’t low for no reason. Supplies are at lofty levels, and Europe continues to drag on demand. The lessening of geopolitical tensions in Ukraine and Iraq are also helping take pressure off of prices. But at this point, it seems like crude oil prices have accounted for all these factors.

So if you do fall into the bull camp and think a rebound in oil prices is on the horizon, there are several ways to make a buck. Three that I like in particular fall in the exchange-traded fund camp:

United States Oil Fund (USO) and DB Energy Fund (DBE)

When it comes to making money on the changes in oil prices, the most direct approach investors have are futures — complex financial contracts that allow investors to go long or short. However, these instruments aren’t easily accessed by most individual investors. Not to mention, individuals must deal with “margin calls” — in short, anyone who borrows from a broker to make a trade must keep a certain percentage amount of cash as a margin requirement, and if that position loses money, a “margin call” forces the investor to add more money to the account, or the broker can sell off equities to make up the difference.

However, if you invest in futures via ETFs, you limit this risk — you can only lose the amount you can invest. Oil ETFs still can be incredibly volatile, though, so they should only represent a minor part of your portfolio.

One of the most popular options here is the United States Oil Fund (USO), which tracks the daily price movements for West Texas Intermediate (WTI) light, sweet crude oil.

Among the crude oil ETFs, USO is the largest, with assets of $745 million and average daily trading volume of nearly 3 million shares. It’s also a reasonably priced fund, charging just 0.45% in expenses, or $45 for every $10,000 invested.

While WTI crude is a large market, there are many other categories available as well.

That’s where the PowerShares DB Energy Fund (DBE) comes in. Besides investing in WTI crude, the DBE there is also exposure to futures in Brent crude (light, sweet crude extracted from Europe), heating oil, RBOB (reformulated gasoline blendstock for oxygen blending) gas and natural gas.

BNE currently has $320 million in assets and charges 0.75% in expenses.

Regardless of the oil ETF you choose, it is important to understand that these types of structures have a big drawback: The fund might have to pay more for futures contracts when there are big swings in prices, resulting in muted returns that don’t precisely track the movements in oil prices, especially over the longer term.

For the most part, oil futures funds are good for capitalizing on short-term moves in oil prices.

Energy SPDR (XLE)

Oil ETF futures might be too much for some investors to stomach, though, so another way to invest is via a fund that just tracks a group of energy-related companies.

The most notable fund is the Energy SPDR (XLE), an enormous fund with $11.5 billion in assets under management that focuses on larger companies in industries dealing with the production, distribution and services for crude oil and natural gas. Top holdings of the fund are a who’s who list of blue-chip energy titans, such as Exxon Mobil, Chevron (CVX) and ConocoPhillips (COP).

XLE offers some modest income in the form of a 1.7% dividend yield, though that’s reasonable considering oil companies often have lower payouts because of hefty capital expenditures costs. But growth has been strong, with average annual gains of 16% over the past five years, and expenses run a dirt-cheap 0.16%.

Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO StrategiesAll About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

Tom Taulli is the author of various books. They include Artificial Intelligence Basics and the Robotic Process Automation Handbook. His upcoming book is called Generative AI: How ChatGPT and other AI Tools Will Revolutionize Business.


Article printed from InvestorPlace Media, https://investorplace.com/2014/08/3-etfs-oil-prices/.

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