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Best oil ETFs to buy in 2021
Oil has powered the world for most of the last two centuries, and as a result, it has been one of the most popular commodities to invest in for many a year. On this page, we list the top oil ETFs and explain what they have to offer for investors. Scroll down to get started.
What are the top oil ETFs to buy?
Our financial analysts have been closely studying the oil market, and they have concluded that the five funds below are your top options. Check them out below.
|#||ETF ticker||ETF name|
|1||USO||United States Oil ETF|
|2||DBO||Invesco DB Oil Fund|
|3||BRNT||WisdomTree Brent Crude Oil ETF|
|4||OILK||ProShares K-1 Free Crude Oil Strategy ETF|
|5||PSCE||Invesco S&P SmallCap Energy ETF|
If you’d like to find out more about each ETF, read on for a detailed description of each of them.
1. United States Oil ETF (NYSEARCA: USO)
USO is the world’s largest oil ETF, with $2.64B in total assets. It is designed to track the price changes of one of the main global oil benchmarks: light, sweet oil delivered to Cushing, Oklahoma. This is better known as West Texas Intermediate (WTI), and this US-produced oil is the lightest and sweetest oil of all the major benchmarks, with a low sulphur content and a high general quality.
The United States Oil ETF is a commodity ETF, which means its holdings are designed to tie the fund’s performance to the price of WTI. However, it also holds US Treasury bills.
The main reason USO has a spot on our list is its sheer scale. If you are looking for an oil ETF with the size and scale to deliver a consent, predictable and trustworthy level of performance, USO appears to be it.
2. Invesco DB Oil Fund (NYSEARCA: DBO)
DBO is another substantial ETF, and it is structured as something called a commodity pool. This combines investor capital together to trade futures contracts for WTI. By doing this, the Invesco DB Oil Fund is engineered to track changes via a rules-based methodology to the DBIQ Optimum Yield Crude Oil Index Excess Return plus income from holdings of US Treasury securities and money market income, minus the fund’s expenses.
As a result, the DBO ETF is best tailored for investors who want to make speculative bets on the price of oil and have a high tolerance for the risks of volatile markets.
The main reason DBO is on our list is its recent performance. In the last five years, it has been one of the top-performing oil ETFs and despite the elevated risks, it offers an intriguing if speculative route to returns for investors.
3. WisdomTree Brent Crude Oil ETF (LSE: BRNT)
The WisdomTree Brent Crude Oil ETF is an exchange-traded commodity that is designed to give investors exposure to the price of brent crude – the most popularly traded oil benchmark, which is produced around the North Sea of Northwest Europe.
In recent years, BRNT has performed well and this is one of the primary reasons it has secured a spot on our list. In addition, we feel BRNT offers the simplest way of gaining exposure to the Brent Complex.
4. ProShares K-1 Free Crude Oil Strategy ETF (BATS: OILK)
Rather than tracking the spot price of oil like many other oil ETFs, the ProShares K-1 Free Crude Oil Strategy ETF is designed to track the performance of an index of crude oil futures contracts comprised of three separate contract schedules for WTI futures.
In practice, this means that OILK tracks the performance of the Bloomberg Commodity Balanced WTI Crude Oil Index, meaning you can expect it to perform vastly differently from the spot price of WTI.
While the last few years haven’t been plain sailing for OILK, it has experienced a resurgence in recent times, and it is on this list because it offers investors a different kind of exposure to the oil market than many of its more linear ETF peers.
5. Invesco S&P SmallCap Energy ETF (NASDAQ: PSCE)
The PSCE is unlike any of the other ETFs on this list. Rather than being a commodity ETF, it is more of a traditional securities ETF. This fund will typically invest at least 90% of its total assets in the securities of small-cap US energy companies within the S&P SmallCap 600® Capped Energy Index – a smaller component of the S&P SmallCap 600® Index.
The ETF’s top three holdings are Matador Resources Co., Southwestern Energy Co., and Helmerich & Payne Inc. In the last five years, this ETF has struggled to establish a positive price trajectory, but its performance in the last year or so has been strong.
PSCE is on this list because it offers investors exposure to the performance of a diversified basket of small-cap stocks within the oil space. The level of jurisdictional and business-model diversification on offer is compelling, and investors can also seek comfort in the fact that some of the companies have additional revenue streams beyond the oil market. However, it is important to note that shares within the ETF are not actively managed, so a fund manager will not be making holding adjustments to achieve superior returns.
Where to buy the best oil ETFs
You can purchase oil ETFs in the exact same way you purchase oil stocks: through a stockbroker. These are regulated online platforms that allow you to purchase a wide variety of assets, including oil ETFs. Check out some of our top picks below; their low fees and high-quality interfaces make them stand out from the crowd.
What is an oil ETF?
An oil exchange-traded fund (ETF) is a fund that trades on the stock exchange, just like a regular stock. The ETF can be one of two things. It can be a commodity ETF that tracks the performance of key global oil price benchmarks, or it can be a securities ETF that consists of a wide variety of publicly traded companies that engaged in the oil and gas industry, and this basket of companies varies depending on the ETF.
Some oil ETFs are passively managed, which means they track the performance of a set index without input from a fund manager. By contrast, actively managed ETFs have a fund manager taking charge who makes decisions about the contents of the ETF with the aim of providing investors with enhanced returns. For instance, this means the fund manager could choose to add a company to the portfolio, remove a company, or increase/reduce the proportion of a company within the ETF.
Since the energy sector can often be volatile, oil ETFs provide an investment that is better equipped to cope with these market dynamics. Rather than an investor betting all of their capital on the performance of a single company, this capital is spread out over numerous companies within the oil and gas sector across different jurisdictions, and often with different business models. This helps reduce the key thing all investors want to avoid: risk
Are oil ETFs a good investment?
This question really needs to be divided into two parts; let’s start with the oil part. Investing in oil has been one of the most popular practices for humans since the dawn of the industrial age. Its integral role in powering the world is unquestionable, and even today, despite mounting scrutiny on fossil fuels by environmentalists, the global oil & gas exploration & production industry stands at a huge $2.1T – larger than all metals markets combined.
The IEA Oil Market Report projects this figure to increase in the coming decade despite the growth and increasing competitiveness of the renewable energy sector. Given the vast growth prospects and stable base of demand for oil, it is one of the top commodities to invest in and a strong option for any type of investor.
So, if oil is a good investment, what about ETFs? The benefit of an ETF is that it gives you exposure to an entire industry rather than a single company like an oil stock. As a result, the performance of your investment is tied much more closely to the overall oil market than if you were to hold shares in an individual oil company. This diversification reduces risk – if one company in your ETF is suffering, other companies within the selection may compensate. ETFs are also cheaper than other funds, such as mutual funds.
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Fact-checking & references
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