Crude oil ETF securities for your portfolio

Crude oil ETF is a frequently mentioned instrument when somebody discusses how to invest in oil. But there are several oil ETFs and they have their specific features. Which one is the best answer to the question of how to invest in oil?

I like to trade this energy ETF as commodity ETFs are now heavily traded instruments. These oil exchange traded funds produce huge moves up and down as investors are trying to find the direction of the economy.

How to invest in oil

Several years ago it was not easy to invest in oil. Or to trade this commodity. But the situation changed.

There are several energy ETFs available today. I personally monitor three exchange traded funds in my ETF watch list. USO, DBO and OLO.

Here is the technical stock chart of USO ETF:

You can compare it with the technical stock charts of DBO (Powershares Commodity etf) and OLO:

You can compare how the ETF charts above are related to price movements of crude oil futures traded on US futures exchanges.

When you look at the charts above you will see a very important issue. All of them are NOT tracking crude price very well. Especially long-term holding of any of exchange traded funds above in a poor option.

Where is the problem with these commodity exchange traded funds?

All these commodity funds are using the futures market. They do not buy physical crude. But futures are contracts with a limited time of lifetime. They need to be rolled over. And this is the problematic issue.

It is not so easy to sell an old contract and buy the next one. There is often a price difference and sometimes it is very large. It means that each roll-over puts some extra costs to these exchange traded funds. And this is the reason why crude price described by futures underperforms.

The worst situation is in USO ETF. USO uses a very simple technique for roll over. But this simple rolling is very costly. DBO and OLO use different techniques.

I have also notified you that OLO is not an exchange traded fund but exchange traded note. And it means that it is something like a bond issued by the issuer of ETN. It also means a little bit more risk for its long-term holding.

Brent Oil Fund

There is also an exchange traded fund that is designed to track the price of another important crude commodity benchmark – Brent oil price. The stock market ticker is BNO and it is traded on US stock markets.

Ultra short oil ETF

It is also possible to speculate a drop in oil prices. As you can see on the chart above, the commodity price is very volatile and there are huge swings up and down. So it is possible to enter the trade targeting lower prices.

Such a trade can be done by shorting of crude futures or shares of energy exchange traded funds. There is an option to buy the inverse exchange traded fund, which goes up when the price drops.

I look sometimes to SCO – UltraShort DJ-UBS Crude Oil exchange traded fund. I do not trade it heavily – I prefer to short some of the titles mentioned above.

Check technical stock chart of SCO ETF:

and compare it with the short term technical stock chart of crude oil futures:

SCO is a twice leveraged ETF. It has its own advantages and disadvantages. The main disadvantage is again that the specific mathematic model driving double leverage is costly and is not ideal for long term holding.

There are more stock market strategies for this commodity ETF securities that are worth checking.