An effective way to invest in oil.
Crude oil has certainly had its ups and downs lately -- and after rallying in spring of 2019 to about $65, the commodity was again on the decline and back in the low $50s until the attack on Saudi Arabia's oil complex caused a spike. Long term, it's anyone's guess where oil will go in an era of energy efficiency and a transition away from fossil fuels toward cleaner sources of power. But it's undeniable that in the short term, crude oil has the potential to move in a big way. Remember, oil prices rallied from more than 40% from their lows at the start of the year to their spring highs. If you're looking to invest in "black gold," then, these seven exchange traded funds offer a simple and effective avenue to buy into oil markets.
United States Oil ETF (ticker: USO)
This is the most direct way to invest in oil via USO, an ETF that invests in short term futures on light, sweet crude delivered to the Midwestern U.S. When crude prices go up, the value of these contracts also rise -- giving you a pure play on how oil itself is moving without worrying about the individual quirks of a publicly traded company. If you're an inexperienced investor not certain how futures work, simply know that they are contracts for a good that will be delivered and paid for at a future date. That means if the market thinks oil will be up tomorrow, these futures rise and USO gains in value. Investors can invest in commodity futures with ease via this oil focused fund.
Energy Select Sector SPDR ETF (XLE)
If stocks are more up your alley, the popular XLE energy sector fund is a go to investment for many looking to play trends in oil. In fact, with nearly $11 billion under management, this SPDR fund is one of the more popular exchange traded products of any kind. The list of holdings is focused to about 30 stocks such as Exxon Mobil Corp. (XOM) and Chevron Corp. (CVX). What's more, those two stocks represent more than 40% of the entire portfolio. This may not be a big deal to those looking to play oil, since these integrated energy megacaps like XOM are at the center of the industry for good reason, but it's worth being aware of.
Microsectors +3X Long Big Oil ETN (NRGU)
There may be some folks out there who are perfectly content putting all their eggs in one basket and a dramatic directional bet on big oil is what they are after. If this approach appeals to you, then consider NRGU, which has an incredibly focused microsector approach that holds only the 10 largest stocks in the oil business. If that wasn't enough, the 3X in the fund's name mean NRGU deploys leverage with sophisticated derivatives to try and generate three times the performance of this core group of holdings. There is big risk here, since you can lose three times as much if the market moves away from you, but this fund is a powerful way to make a directional play on the sector.
iShares US Oil & Gas Exploration & Production (IEO)
Another way to invest in the oil patch is to worry less about the big guys and instead focus on the very beginning of the crude oil supply chain through exploration and production firms. This subsector of the energy space is perhaps the most sensitive to oil prices because it is first in line and then markets reserves at current prices to refiners, wholesalers and other downstream players. And while some big oil stocks sneak into this fund, they are held at a much smaller percentage of the total portfolio. When oil prices rise, that means explorers can command better prices almost immediately. But what goes up also can go down, so keep in mind these explorers slump when oil prices are soft.
VanEck Vectors Oil Services ETF (OIH)
A related approach is to look beyond dedicated energy companies and focus on the network of service providers that help develop oilfields. These are firms like Schlumberger Ltd. (SLB), National Oilwell Varco (NOV) and Halliburton Co. (HAL) -- stocks you may not be as familiar with, but hold deep ties to integrated energy giants like Exxon. These companies don't own the vast tracts of land or the fossil fuels underneath, instead they are hired to drill a well or manage production projects. When oil prices rise the big oil companies spend on new contracts and bring their reserves to market. But keep in mind that when oil prices fall, it's much easier to simply cut out a third-party provider to reduce expenses.
Global X MLP ETF (MLPA)
MLPA invests in some of the largest master limited partnerships, or MLPs, in the energy sector. This special class of energy infrastructure company is structured as a pass through partnership, where profits are funneled directly to investors via big dividends. These include Enterprise Product Partners (EPD), which boasts nearly 25,000 miles of pipelines, and Energy Transfer Partners (ET), which offers storage and terminal services. Many of these MLPs also have close ties to the natural gas industry. Their integral place in the energy sector makes them a good indirect play on oil for income. Based on the last four distributions, this fund yields 8.7%.
iShares Global Energy ETF (IXC)
While all of these funds have largely been focused on U.S.-based investment themes, oil is a decidedly global marketplace. After all, who cares whether a company is headquartered in Texas if it has operations in the Middle East, Asia and Europe? Another way to slice the sector is to include firms based outside of America's borders, including U.K. giant BP (BP), Royal Dutch Shell (RDS.A) and French oil giant Total (TOT). Not only will this give you a more diversified approach geographically, the inclusion of these foreign companies helps take some of the focus off domestic oil stocks that can dominate a typical energy sector fund. The top three holdings in IXC represent less than 30% of this fund.
Best oil ETFs to buy:
-- United States Oil ETF (USO)
-- Energy Select Sector SPDR ETF (XLE)
-- Microsectors +3X Long Big Oil ETN (NRGU)
-- iShares US Oil & Gas Exploration & Production (IEO)
-- VanEck Vectors Oil Services ETF (OIH)
-- Global X MLP ETF (MLPA)
-- iShares Global Energy ETF (IXC)
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