After feeble trading at the end of last year, oil price made a nice comeback and is hovering around this year’s high on OPEC-led fresh crude output cuts and falling output from Iran and Venezuela due to U.S. sanctions. Notably, oil price in New York has rallied 30% this year so far (read: Oil Jumps: 4 ETFs to Benefit & 4 to Suffer).
The Organization of the Petroleum Exporting Countries (OPEC) has agreed to curb production by 1.2 million barrels per day during the first six months of 2019 in order to tackle global supply glut and rebalance the oil market. The 14-member OPEC cartel has agreed to reduce its output by 800,000 barrels per day, while Russia and the allied producers will take off 400,000 barrels per day from the market. Further, the Fed’s dovish outlook, which pushed the U.S. dollar down, led to a spike in oil price. Notably, a weak dollar made dollar-denominated assets cheap for foreign investors, potentially raising demand for commodities.
However, renewed fears of global slowdown and lingering uncertainty surrounding the US-China trade deal have dampened the outlook for oil demand, thereby capping the oil rally. Additionally, U.S. crude oil production has risen more than 2 million barrels per day since early 2018 to around 12 million barrels per day, making the United States the world's biggest producer ahead of Russia and Saudi Arabia. The combination of higher domestic production and prospect of reducing demand is weighing on the oil price.
Given the clouds over the outlook for oil investment, investors should place their bet on oil ETFs cautiously or could take advantage of the quick turn in sentiment with the help of leveraged or inverse ETFs.
These ETFs might be easier plays for investors seeking to deal directly in the futures market.
United States Oil Fund USO: This is the most popular and liquid ETF in the oil space with an AUM of $1.6 billion and average daily volume of more than 28.3 million shares. The fund seeks to match the performance of the spot price of West Texas Intermediate (WTI or U.S. crude). The ETF has 0.45% in expense ratio (read: Wall Street's Best Start Since 1987: Top ETFs of Top Sectors).
United States Brent Oil Fund BNO: This fund provides direct exposure to the spot price of Brent crude oil on a daily basis through future contracts. It has amassed $97.6 million in its asset base and trades in a good volume of roughly 360,000 shares a day. The ETF charges 75 bps in annual fees and expenses.
Invesco DB Oil Fund DBO: This product provides exposure to crude oil through WTI futures contracts and follows the DBIQ Optimum Yield Crude Oil Index Excess Return. The fund sees solid average daily volume of around 788,000 shares and has AUM of $319.4 million. It charges an expense ratio of 0.78%.
iPath S&P GSCI Crude Oil Total Return Index ETN OIL: This is an ETN option for oil investors and delivers returns through an unleveraged investment in the WTI crude oil futures contract. The product follows the S&P GSCI Crude Oil Total Return Index, a subset of the S&P GSCI Commodity Index. The note has amassed $99.4 million in AUM and trades in a paltry volume of 7,000 shares a day. Its expense ratio came in at 0.75%
United States 12 Month Oil Fund USL: USL provides investors exposure to front-month WTI futures contracts. It is unpopular and less liquid with AUM of $63.9 million and average daily volume of 19,000 shares. Its expense ratio is 0.86% (read: Hedge Funds Bet Big on Oil: ETFs in Focus).
Leveraged Oil ETFs
Investors who are bullish on oil may consider a near-term long on the commodity with the following ETFs depending on their risk appetite.
ProShares Ultra Bloomberg Crude Oil ETF UCO: This fund seeks to deliver twice (2x or 200%) the returns of the daily performance of the Bloomberg WTI Crude Oil Subindex, which consists of futures contracts on crude oil. It has $442.3 million in AUM and trades in heavy volume of about 3.5 million shares a day on average. Its expense ratio came in at 0.95%.
VelocityShares 3x Long Crude Oil ETN UWT: This seeks to deliver thrice (3x or 300%) the returns of the S&P GSCI Crude Oil Index Excess Return and has amassed $422.2 million in its asset base. The ETN trades in heavy volumes of around 8.8 million shares a day though it charges a higher fee of 1.50% per year.
ProShares UltraPro 3x Crude Oil ETF OILU: This ETF offers three times exposure to the daily performance of the Bloomberg WTI Crude Oil Subindex. The fund has amassed $137.9 million in its asset base and trades in solid average volume of 802,000 shares. It charges investors 95 bps in annual fees (read: How to Play Oil Rally With Leveraged ETFs).
UBS ETRACS ProShares Daily 3x Long Crude ETN WTIU: With AUM of $21.3 million, WTIU also delivers three times exposure to the daily performance of the Bloomberg WTI Crude Oil Subindex ER. It has an expense ratio of 1.45% and trades in average daily volume of 77,000 shares.
United States 3x Oil Fund USOU: This fund provides three times the daily price movements of WTI oil, charging investors 1.00% in expense ratio. It has accumulated $22.3 million in its asset base and trades in moderate volume of 94,000 shares a day.
Inverse Oil ETFs
Any negative news flow could provide investors’ a near-term short opportunity on the commodity according to their risk appetite.
DB Crude Oil Short ETN SZO: This is an ETN option and arguably the least risky choice in this space as it provides inverse exposure to the WTI crude without any leverage. It tracks the Deutsche Bank Liquid Commodity Index – Oil – which measures the performance of the basket of oil future contracts. The note is unpopular as evident from an AUM of $0.9 million and average daily volume of under 1,000 shares a day. Its expense ratio is 0.75%.
ProShares UltraShort Bloomberg Crude Oil SCO: This fund seeks to deliver twice the inverse daily performance of the Bloomberg WTI Crude Oil Subindex. It has attracted $67.6 million in its asset base and charges 95 bps in fees and expenses. Volume is solid as it exchanges nearly 2.5 million shares in hand per day.
DB Crude Oil Double Short ETN DTO: This ETN provides 2x inverse exposure to the Deutsche Bank Liquid Commodity Index-Light Crude. It has amassed $15.1 million in its asset base and trades in a paltry daily volume of roughly 4,000 shares. The product charges 75 bps in fees per year.
United States 3x Short Oil Fund USOD: The ETF creates a three times short position in the movements of WTI. It has amassed about $2.26 million in its asset base and has expense ratio of 0.95%. Volume is solid as it exchanges around 36,000 shares a day on average (see: all the Inverse Commodity ETFs here).
ProShares UltraPro 3x Short Crude Oil ETF : This fund seeks to deliver thrice the daily inverse performance of the Bloomberg WTI Crude Oil Subindex. It has attracted $12.4 million in its asset base and charges 95 bps in fees and expenses. Volume is solid as it exchanges nearly 434,000 shares in hand per day.
UBS ETRACS ProShares Daily 3x Inverse Crude ETN WTID: This ETN is linked to the daily compounded 3x leveraged inverse performance of the Bloomberg WTI Crude Oil Subindex ER. It has lower AUM of $3.1 million in AUM and trades in light volume of 4,000 shares a day. Expense ratio is pretty high at 1.85%.
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