ETF Investors Need To Choose Their Energy Exposure Carefully In 2010

oildrum“Many energy-stock funds went on a tear in 2009. Not all funds participated in the rally, however—and investors should resolve to choose their energy exposure carefully in 2010. What about getting into energy through an ETF that owns oil or gas futures, as opposed to a fund holding energy stocks? It’s largely a question of an investor’s conviction in the outlook for energy prices. An oil company might eke out profits even if oil prices go down; there’s no such margin for error with an oil future. But oil stocks don’t always go up as fast as commodity futures, either—so you might see more immediate results with an ETF,” Rob Curran Reports From The WSJ.

“Investors considering energy ETFs should also note that their performance may not match changes in the spot prices for oil and gas over time because of price variations among different months’ futures contracts. While oil futures rose 78% in 2009, U.S. Oil Fund, an ETF that owns the “front month,” or most actively traded, oil futures contracts, rose only about 19%,” Curran Reports.

“John Hyland, the chief investment officer of U.S. Commodity Funds, which manages the U.S. Oil Fund, says the only way to capture the exact changes in the spot price for oil would be to buy and hold barrels. Storage costs make this impractical,” Curran Reports.

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The investment (USO) seeks to reflect the performance, less expenses, of the spot price of West Texas Intermediate (WTI) light, sweet crude oil. The fund will invest in futures contracts for WTI light, sweet crude oil, other types of crude oil, heating oil, gasoline, natural gas and other petroleum based-fuels that are traded on exchanges. It may also invest in other oil interests such as cash-settled options on oil futures contracts, forward contracts for oil, and OTC transactions that are based on the price of oil.

Company Symbol % Assets
F/C Ws Crude Future Sep09 N/A 12.33
F/C Wti Crude Future Sep09 N/A 87.68
Fidelity Instl MM Fds Government I N/A 28.89
Goldman Sachs FS Government Sel N/A 22.73
Morgan Stanley Inst Liquidity Gov Inst N/A 11.11

Chart for United States Oil (USO)

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