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Should You Play the Oil Rebound with ETFs?

Neena Mishra

Oil prices have rebounded over the past three weeks as economies start slowly reopening for business, boosting demand for crude. Recent gains have come after a historic crash when oil prices for future delivery turned negative for the first time ever on April 20.

Coronavirus shutdowns have great reduced demand for oil while supply has been going up over the past few years, thanks mainly to surging US shale production. And recent production cuts have been much lower than the fall in demand, due to breakdown in the original OPEC+ agreement.

ETFs and ETNs that bet on oil prices using futures contracts are good at tracking the commodity in the shorter-term but could perform much worse than the commodity in the longer-term due to contango issues. Contango means futures for distant months are more expensive than those expiring soon. When ETFs roll their contracts, i.e. sell expiring contracts and buy more expensive later dated ones, they suffer losses.

The most popular oil ETFs—the United States Oil Fund (USO) , the ProShares Ultra Bloomberg Crude Oil (UCO) and the Invesco DB Oil Fund (DBO)--use different futures strategies to track oil prices. To learn more about these ETFs, please watch the short video above.

Investors should remember that leveraged, inverse and futures tracking products are meant for active traders for hedging or speculation. They are not meant for retail investors who do not understand them. For individual investors trying to play the oil’s ultimate rebound, it is better to invest in ETFs that hold energy companies, rather than futures.

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Invesco DB Oil ETF (DBO): ETF Research Reports
 
United States Oil ETF (USO): ETF Research Reports
 
Direxion Daily SP Oil Gas Exp. Prod. Bull 2X Shares (GUSH): ETF Research Reports
 
ProShares Ultra Bloomberg Crude Oil (UCO): ETF Research Reports
 
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