5 Factors Benefiting Oil ETFs and How to Play It

October 29th at 1:00pm by Tom Lydon

ETF oilGlobal economies are growing fast and monetary policy in the United States is loose. These and other factors are fueling the rise of exchange traded funds (ETFs) related to the oil industry.

  • More cars. China and India’s burgeoning auto industries are producing an expected 11 million and 2.5 million cars, respectively, while Brazil’s auto sales surged 20% in September. This translates into increased demand for oil.
  • Weak U.S. dollar. The price of oil and the dollar historically have an inverse correlation; oil is priced in dollars, so as it weakens, oil becomes cheaper for foreigners. As the U.S. government takes on more debt, investors are predicting a further depreciation of the dollar. (Oil trading without the dollar)
  • Scarcity. Oil bulls argue about a “peak oil,” where the peak of global oil production will finally be seen. Oil, like other commodities, is a finite resource.

There are several ways to play oil. Some ETFs hold shares of major oil companies, such as Exxon Mobil (NYSE: XOM) and Chevron (NYSE: CVX). These companies range from oil exploration, to refining, to production. Examples include:

  • PowerShares Dynamic Energy (NYSEArca: PXI): up 32% year-to-date

ETF DBO

  • SPDR S&P Oil & Gas Exploration & Production (NYSEArca: XOP): up 32.5% year-to-date

ETF DBO

There are also oil ETFs that hold futures contracts. ETFs that hold futures give investors the chance to capitalize on oil prices without having to worry about rolling over contracts or taking delivery. For more information on oil, visit our oil category.

  • United States Oil (NYSEArca: USO): up 19.2% year-to-date

ETF DBO

  • PowerShares DB Oil (NYSEArca: DBO): up 40.2% year-to-date

ETF DBO

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.