The oil market is notoriously volatile, but savvy investors can make big profits by playing the swings. However, investing in crude and other commodities can be intimidating for the uninitiated. Traditionally, investors used futures and options to bet on crude prices, but these days, oil ETFs make it easy for beginners to get involved. No matter which way you think oil prices are headed, there is an oil ETF that will make you money if you’re right.
The best oil ETFs come in various forms and they serve various purposes. Some funds hold a basket of oil companies, while others invest in commodity futures. You can make bearish bets with inverse oil ETFs or double down with leveraged ETFs. There are dozens of funds to choose from, so there is sure to be one that fits your investment objectives and risk tolerance.
Best By Category
We’ve separated our top picks into several categories, so you can easily find what you’re looking for.
Best Oil ETFs
There are various types of crude ETFs, but the most basic funds track the price of oil through the use of commodities and options. Since these funds track oil prices, they increase in value when oil prices go up. These are some of the best Oil ETFs on the market.
These funds track the price of West Texas Intermediate, which is the benchmark price for US crude oil. WTI is the primary index for all oil sourced in the United States, so don’t let the name fool you. Any oil produced domestically is usually classified as WTI, so the “West Texas” handle is a bit of a misnomer.
United States Oil Fund (USO)
The United States Oil Fund tracks the price of West Texas Intermediate light crude oil through futures contracts. This is one of the highest-volume oil ETFs in the US, so it’s very liquid and a good choice for newer oil traders. It’s also one of the largest Oil ETFs in the US with over $1.4 billion in net assets.
USO follows the Bloomberg WTI Cushing Crude Oil Spot Index by way of WTI futures. WTI futures comprise 100% of this fund’s holdings, so this is a pure-play option for oil bulls. The gross expense ratio for this stock stands at 0.84%.
Invesco DB Oil Fund (DBO)
The Invesco DB Oil Fund also trades WTI futures, but it’s designed to track a different benchmark index. However, it tends to move similarly to the USO. This fund uses the Deutsche Bank Liquid Commodity Index (DBCLI) Optimum Yield (OY) Crude Oil Index as its primary benchmark.
This index utilizes futures differently than the Bloomberg WTI index, so there is sometimes disparity between it and the USO. However, they both trade WTI futures as their sole holding, so the differences tend to be minimal.
The DB oil fund currently has over $238.2 million in net assets and a 0.75% expense ratio.
Brent is a different type of oil that is sourced mainly in Europe. The name comes from the Brent oil basin, located in the North Sea. Brent oil is significantly different than WTI. It tends to have higher sulfur content, so it’s ‘darker’ or more ‘sour’ than WTI. Brent has its own unique market, so there’s an entirely different set of supply & demand considerations that can affect prices. The difference between the price of Brent and WTI is measured by the Brent WTI spread.
WTI is the highest-quality sweet crude available, but Brent is actually the most used oil globally.
The fracking boom unlocked a wealth of oil in the United States, but it can be very expensive to transport and ship. In fact, there was an export ban on oil produced in the US until 2015, so we’ve only been shipping oil abroad for a few years. US oil infrastructure is far behind that of Europe. Delivering WTI to high-demand markets in Europe and Asia can be so expensive that it can’t compete with Brent in terms of pricing.
Locally sourced Brent oil is closer and cheaper to ship, so international consumers tend to go with the option that offers the most value. It’s one of the reasons Brent is the most used oil on the planet.
United States Brent Oil Fund (BNO)
This fund tracks the price of Brent oil. It’s a small fund in comparison to the USO, with only $83.4 million in net assets. It has the same ownership as the USO, so it operates in a similar fashion. It used futures to track the price of Brent oil, and these futures comprise 100% of its total holdings.
BNO’s expense ratio is slightly higher than its counterparts. The fund charges 0.9% for annual expenses.
Oil Services ETFs
The oil equipment and services sector consists of companies that provide ancillary services to oil and gas producers. Oil services companies offer a variety of energy-related services, including exploration, equipment maintenance, refining, and much more. The energy sector is vast and intricate, so there are hundreds of companies that provide dozens of different services in this industry. Oil services ETFs hold stocks from these companies, so they tend to perform well when the oil sector is riding high.
VanEck Vektors Oil Services ETF (OIH)
This oil services ETF tracks the MVIS US Listed Oil Services 25 Index, which is a cap-weighted index that tracks the top oil services firms listed on US exchanges. It’s like the Dow Jones of oil services stocks. The 25 companies it holds are the largest, most notable companies in the oil equipment and services sector, so they represent some of the top picks in the category. This fund invests in both local and foreign companies, but all of its holdings are listed on US exchanges.
Unlike the oil ETFs listed above, these funds hold company stocks. They don’t hold any crude futures or options, so oil prices don’t directly affect share prices. However, oil prices have a direct effect on these companies in terms of their bottom line, so wide swings in crude prices have a significant impact on these stocks.
The gross expense ratio for this ETF is 0.35%, and the fund manages over $688 million in assets.
SPDR S&P Oil & Gas Equipment and Services ETF (XES)
This fund includes companies that service the natural gas industry too. For its benchmark, it tracks the S&P Oil & Gas Equipment and Select Industry Index. As opposed to the MVIS US 25, this is an equal-weight index.
This gas and oil services ETF holds 32 different companies that service the energy sector. It’s top three holdings are Nabors Industries LTD (NBR), Valaris PLC (VAL), and Helmerich and Payne Inc. (HP). The fund is on the smaller side, with only $175.3 million in net assets. This ETF is passively managed and it has a 0.35% expense ratio.
ETF for Oil and Gas
Energy Select Sector SPDR Fund (XLE)
The Energy Select Sector SPDR Fund follows the performance of the Energy Select Sector Index. This fund aims to passively track the energy sector by holding a basket of select stocks.
The fund contains companies in the oil, gas, energy, and service & support sectors. This is a market-cap weighted fund, so its holdings are highly concentrated in larger companies. Roughly half of the fund’s net assets consist of only two companies, Chevron Corporation and Exxon Mobil. Due to its high concentration in these stocks, the Energy Select Sector SPDR Fund carries more individual stock risk than other, more diversified ETFs.
iShares U.S. Energy ETF (IYE)
The iShares U.S. Energy ETF tracks a collection of US energy stocks. The fund primarily invests in companies that produce, process, and distribute oil and gas.
Similar to the Energy Select Sector SPDR Fund, the iShares U.S. Energy ETF holds most of its investments in Exxon Mobil Corp and Chevron Corp. About 47% of the fund’s total investments are in those two companies.
The expense ratio for this fund is around 0.42%
Leveraged Oil ETF
ProShares Ultra Bloomberg Crude Oil (UCO)
ProShares Ultra Bloomberg Crude Oil is a leveraged ETF that offers twice the returns as a normal index-tracking ETF. Similar to most leveraged ETFs, the ProShares Ultra Bloomberg Crude Oil accurately tracks the benchmark only for a day.
Thus, investors could see divergence if they hold this ETF longer than a day. This makes the funds suitable for day trading rather than long-term investing.
The expense ratio of this fund is 0.95%
Inverse Oil ETFs
ProShares UltraShort Bloomberg Crude Oil (SCO)
This ETF tries to produce twice the inverse daily performance of the Bloomberg WTI Crude Oil Subindex. It is an option for traders who want to short the oil market without having a futures account or to post margin either.
The expense ratio of this fund is 0.95%
What To Consider Before Investing In An Oil ETF
Oil price is dictated by supply and demand for the product. According to market analysts, fluctuations in oil prices could help determine changes in inflation. This implies that customer prices usually decline when oil prices fall and vice versa.
The increase in oil prices usually sees people travel less, which negatively affects the airline sector. The report by the Energy Information Agency every Wednesday is something oil traders look forward to.
The Weekly Petroleum Status Report tells market participants the changes in the sector. Some of the captured modifications include those in the gasoline and distillate inventories and crude oil inventories. It also captures the operating rate of US refineries.
Despite that, the Organization of Petroleum Exporting Countries (OPEC) remains a crucial player in determining the price of oil fluctuations. OPEC nations control roughly 40% of the world’s oil supply. They meet at least once a year to talk about production levels.
Best Oil ETF: Closing Thoughts
The energy sector plays a crucial role in the overall economy. Investors interested in gaining access to the oil sector should do so via an Oil ETF. They can choose a fund that resembles the performance of crude oil or one that invests in oil-related stocks.
Oil ETFs give investors access to a wide range of companies in the oil sector. If you’re ready to know more about the best oil ETFs, you should sign up for Stock Dork Alerts. Our reports are written in plain English, so they’re easy to understand. Sign up today and get a jump on the New Year with our 2020 Growth Stock Guide, it’s yours free when you join. Click here to join and claim your free copy now.