Oil ETFs (Exchange Traded Funds)
January 15th, 2007 by Justin
If you read my article on trading oil futures, you know that trading oil can be very expensive if you’re on the wrong side of the trade in terms of the carry charge. Another option worth exploring is the oil ETF, short for exchange traded fund. For a general explanation of the term exchange traded fund, click here.
ETFs, in essence, attempt to mimick the performance of oil futures. The only one I’m aware of, and one which I’ve traded from time to time, has the symbol USO, and is called US Oil Fund. It launched in early April, 2006, and has since steadily declined. Not only was it launched near the peak in the price of oil, but it faces a structural problem that has caused it to decline even more than the near-month oil futures price over the same period of time.
For the details on why the price declines over time, read my in-depth piece on oil futures. Suffice it to say, that unless oil stops bidding for storage, the cost of buying oil months and years out will continue to be much higher than the current price. This means holding a long position in USO is too expensive to be worthwhile. If you were of the mind that oil is going to drop, however, you’d have the carry cost working in your favor.
[…] In recent articles I’ve discussed the two primary options for trading the price of oil directly. One is oil futures, and the other the oil ETF (exchange traded fund, symbol USO). I recently became aware of another option, which is as close as a private investor can get to trading spot oil, to my knowledge. […]