Best Oil ETFs to Watch in 2021
Oil prices have been on a rollercoaster ride in recent years, crashing to 30-year lows after the pandemic before rallying more than 500% into 2021.
It’s just one reason investors are keen to identify what the best oil ETFs (exchange traded funds) are for this year.
These type of funds aim to track an index of oil prices by investing in oil directly or through derivatives like futures or options - allowing the investor to just focus on one investment to diversify their portfolio.
Let’s take a look at some of the best oil ETFs to watch, how oil ETFs work and how to invest in them with low commissions!
Table of Contents
Best Oil ETFs to Watch in 2021 List
Here is a quick-fire list of some of the best oil ETFs to watch this year. Of course, this list is not exhaustive but it does serve as a great starting point.
- United States Oil Fund LP ETF - Best for WTI Crude Oil Exposure
- Lyxor STOXX Europe 600 Oil & Gas UCITS ETF - Best for European Oil & Gas Company Exposure
- iShares Oil & Gas Exploration & Production UCITS ETF - Best for US Oil & Gas Production Companies
More detailed analysis and research of these ETFs can be found further down this article.
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Now let’s have a look at how oil ETFs work before looking at each of the ones listed above in more detail before we look at how to invest in them using the world’s most popular investing platform.
How do Oil ETFs Work?
An oil ETF (exchange traded fund) acts in a similar way to a mutual fund. The investment company that creates the ETF would simply buy oil-related securities to track a benchmark oil index.
The securities the fund management company invests in can vary from shares in an oil or gas-related company, or it could be buying oil directly or through derivatives such as futures and options.
Investors can then trade on the price of an oil ETF like any other stock as they are also listed on the stock exchange. This provides investors with the ability to diversify their portfolio into commodity and energy markets.
Different Types of Oil ETFs
When trading ETFs in oil it is important to know the different types there are.
This is especially important when it comes to risk management as some ETFs can amplify your returns and losses more than you may typically expect.
A few unique ETFs that are important to know about include:
Leveraged Oil ETFs
A leveraged oil ETF amplifies the price swings of the benchmark oil index it is following. There are a variety of different types of leveraged oil ETFs too. There is the ETFS 2x Daily Long WTI Crude Oil ETF and the ProShares UltraPro 3x Crude Oil ETF.
Let’s take the ETFS 2x Daily Long WTI Crude Oil ETF as an example. This instrument offers investors leveraged exposure to the total return of an investment in WTI (West Texas Intermediate) oil futures contracts. It does this by tracking the Bloomberg WTI Crude Oil Index.
As the fund is 2x leveraged, it means the fund is designed to move 200% of the daily percentage change of the Bloomberg WTI Crude Oil Index. So, if the index moved 5% in a day, then the leveraged fund would move 10%.
Of course, while this amplifies possible returns it also amplifies the losses as well so it may not be that suitable for beginner investors. As always, risk management is key to long-term, successful investing.
Inverse Oil ETFs
Inverse oil ETFs allow investors to potentially profit from falling oil prices. This is because inverse oil ETFs move in the opposite direction (the inverse) of the benchmark oil index it is following.
If oil prices were falling, then it is likely any benchmark oil index would also fall. In this instance, the inverse oil ETF would rise. Therefore, if an investor believed oil prices are likely to fall, they could buy an inverse oil ETF and potentially profit as oil prices fall.
Are Oil ETFs a Good Investment?
Deciding whether or not oil ETFs are a good investment in your investing portfolio ultimately depends on several factors including what the market is doing, your tolerance to risk and your overall knowledge and experience.
Oil prices are notoriously volatile as they are affected by a variety of different factors beyond just supply and demand. It is a politicised commodity and often finds itself at the mercy of geopolitical tensions. This volatility may not suit all types of investors as everyone has a different risk tolerance level.
Of course, educating yourself on the fundamental analysis and technical analysis of oil is important to help identify directional biases in the commodity. Fortunately, when you open a demo or live trading account with Admirals you have access to a ton of educational resources to learn!
3 Best Oil ETFs: Research & Analysis
There are many different investment management companies that provide access to oil ETFs. There are Vanguard oil ETFs, iShares ETFs and many others. Let’s have a look at the top three to watch this year.
1. United States Oil Fund LP ETF (USO)
The United States oil Fund is an exchange traded product whose shares trade on the New York Stock Exchange Arca. The aim of the fund is for the daily changes in percentage terms to reflect the daily changes in percentage terms of the light sweet crude oil spot price.
The fund aims to be within plus/minus 10% of the average daily percentage change in the benchmark oil futures contract which is the near month futures contract of West Texas Intermediate Oil (WTI). In some cases, it could also be the subsequent month futures contract.
Source: Admirals MetaTrader 5, USO, Monthly - Data range: from 1 Apr 2006 to 21 May 2021, performed on 21 May 2021 at 1:30 pm GMT. Please note: Past performance is not a reliable indicator of future results.
In the above long-term price chart of the United States Oil Fund ETF, it’s clear to see the long-term downtrend. The price has had some significant periods of consolidation during the downtrend.
As the economy reopens from the coronavirus pandemic, the demand for oil may start to see an increase. Especially because less may be produced due to the shift toward renewable energy.
From a technical analysis perspective, if the price can trade back above the previous resistance line around ~$70.00, as shown by the black horizontal line, then it is a sign buyers could start to regain control.
2. Lyxor STOXX Europe 600 Oil & Gas UCITS ETF (OIL)
The Lyxor STOXX Europe 600 Oil & Gas UCITS ETF is a more diversified product that focuses on investments within the oil and gas industry. The aim of the fund is to track the benchmark index STOXX Europe 600 Oil & Gas which focuses on the largest stocks within the oil and gas industry in Europe.
As of May 2021, the fund’s biggest holdings included 25.06% in Total SA, 15.39% in BP PLC, 14.03% in Royal Dutch Shell with many more major oil and gas companies such as ENI SPA, Statoil ASA, Repsol SA, Siemens Energy AG, etc.
Source: Admirals MetaTrader 5, OIL, Monthly - Data range: from 1 Nov 2006 to 21 May 2021, performed on 21 May 2021 at 1:30 pm GMT. Please note: Past performance is not a reliable indicator of future results.
In the long-term price chart above for the fund, it’s clear to see the consolidation that has developed between €48.14 and €25.65, as drawn on by the two black horizontal lines.
These type of support and resistance lines can provide interesting zones for turning points in the market as is the very basis of technical analysis of charts.
You can make technical analysis much simpler by using the exclusive Premium Analytics tools from Admirals.
This includes FREE access to the Technical Insight Lookup indicator which provides actionable trading and investing ideas on thousands of different markets including oil ETFs.
3. iShares Oil & Gas Exploration & Production UCITS ETF (IOGP)
iShares by BlackRock is one of the world’s largest ETF providers. The iShares Oil & Gas Exploration & Production UCITS ETF is designed to track the performance of an index that is composed of the biggest global companies involved in the exploration of oil and gas production.
This fund provides investors with the opportunity to capitalise on the sector without trying to pick the best individual stock, thus providing a more diversified and broader exposure.
Source: iShares, 21 May 2021. Past performance is not a guarantee of future performance.
As of May 2021, the fund had 43 holdings in countries all over the world including the United States, Canada, Australia, Russia, Japan and elsewhere. Some of the fund’s top holdings included 10.69% in EOG Resources, 10.44% in Canadian Natural Resources Ltd, 9.29% in ConocoPhillips and many others.
Oil prices are likely to remain volatile for the foreseeable future as economies reopen and international travel resumes.
However, due to natural headwinds that could come from US President Joe Biden’s renewable energy policy, having a diversified portfolio is essential.
Oil ETFs can provide such diversification. One of the best ways to gain more familiarity with these products is to open a demo trading account.
With a demo account, you can invest in a virtual environment until you are ready to go live! This is a great way to test all of the services provided by Admirals and your own ideas.
Get started today by clicking on the banner below!
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