Here’s How To Play Oil’s Rebound Using ETFs

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December 7, 2016 7:32am NYSE:UCO

NYSE:UCO | News, Ratings, and Charts

From Brad Hoppmann: Oil is a popular topic these days. And for good reason.


Last week we told you about the OPEC production-cut deal, where members of the cartel agreed to reduce production to 32.5 million barrels per day. (It’s recently been producing about 35 million barrels a day.)

This was the first cut by OPEC in eight years. It marked the first retreat from the so-called “pump-at-will” policy introduced in 2014.

That policy left the world awash in oil. And it created a crude oil glut that put a virtual lid on prices for much of the past two years.

Now that trend could be about to change, as crude oil prices have surged more than 12% in just the past week!

Despite its recent run, oil continues to be one of the most-volatile commodities in recent years. Remember that it was just a little over two years ago (June 20, 2014) that the price of crude was trading at $107.26 a barrel. Oil then bottomed at $26.21 on Feb. 11, 2016.

Today, oil trades north of $50.

These are the kinds of sharp trend fluctuations that investors can take advantage of … if they have the right investment tools for the job.

If you think oil can continue its recent move to the upside, then there are several great Exchange-Traded Funds (ETFs) that help individual investors to do just that.

The best part about these oil-related ETFs is that you don’t have to be a commodities trader to use them. In fact, owning them is as easy as buying any stock — and a lot easier and more flexible than owning a mutual fund.

For a longer-term bullish play on oil, it’s hard to beat “old faithful” — i.e., the United States Oil Fund (NYSE:USO). This is the investing public’s favorite way to play oil.

Our resident ETF guru, Grant Wasylik, recently spoke to John Love. Love is the president and CEO of USCF Investment, the company that issues USO.

According to Love:

“We brought USO to the market 10 years ago to democratize access to oil markets, and it quickly became one of the largest and most liquid ETFs on the market, and we are proud of its success.”

USO is designed to track the daily price movements of West Texas Intermediate (“WTI”) light, sweet crude oil.

While oil’s been drilled over the long term, USO has done an excellent job tracking its benchmark …

Source: www.uscfinvestments.com

As you can see, USO’s tracking error is minimal over long-term periods.

One thing to note here, however, is that like many commodity ETFs, USO’s benchmark is a futures contract, which must be rolled prior to expiration.

The “roll” can have a positive or negative impact on the fund. Returns that match the spot price are not actually achievable over the longer term. So investors must factor in the impact of the roll.

Here’s another reason to take a closer look at USO …

USO is the largest and most-liquid exchange-traded product in the space. The fund’s $3.7 billion in assets is triple the assets of the next three biggest straight-oil ETFs (OIL, DBO, USL) combined.

As you might expect with all those assets, USO’s expense ratio (0.72%) is lower than the majority of its top competitors.

Since the Nov. 30 OPEC decision was announced, USO has jumped more than 12%.

Oil broke its four-day win streak today as traders took some profits off the table.

One thing I don’t like about USO, however, is that it’s structured as a limited partnership (LP). This means investors receive the uncomfortable “K-1” statement form at tax time.

While nobody likes this added layer of tax complexity, a well-timed buy in USO could more than offset any tax hassles.

Still, if you’d prefer to avoid the messy tax complications associated with a K-1, there’s a new oil ETF in town to the rescue … the ProShares K-1 Free Crude Oil Strategy ETF (BATS:OILK).

Grant did some research on this fund, which just launched two months ago. He told me that while it’s much smaller than USO, with only about $6 million in assets, it is attractive for two main reasons …

It’s the only U.S. crude oil ETF with no K-1, and its 0.65% expense ratio is even cheaper than USO’s.

Now, if you’re a fervent oil bull, you can add a little leverage to your bet with the ProShares Ultra Bloomberg Crude Oil ETF (NYSE:UCO). This fund is designed to give you twice the daily performance of the benchmark crude oil futures index. This makes it a good choice for oil’s true believers as well as short-term momentum traders.

Of course, you might be skeptical of oil here, and unconvinced that its recent rise is sustainable.

If that’s the case, then you can still place your crude bet with the ProShares UltraShort Bloomberg Crude Oil ETF (NYSE:SCO).

This leveraged, inverse ETFs is designed to deliver twice the inverse of the daily performance of the aforementioned crude oil futures index … the same index used in UCO.

So, whether you’re an oil bull or an oil bear, there are numerous ways to take advantage of the commodity sector’s most intriguing, and most “in play,” asset class.

This article is brought to you courtesy of Uncommon Wisdom Daily.


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