Oil prices have plunged the past week with crude futures dropping below $86 a barrel after touching $110 earlier this year. Contrarian investors, however, can consider oil ETFs for a rebound in energy prices.
Physical oil exposure provide investors as an added hedge and diversifier for a well-rounded investment portfolio. Currently, there are a number of ways to gain exposure to oil and other oil products through exchange traded funds.
To start off, most investors typically look at crude oil futures, specifically the West Texas Intermediate light, sweet crude, which is prized for its low-sulfur content.
The United States Oil Fund (NYSEArca: USO) is the largest ETF that tracks WTI crude oil futures. USO holds near month contracts, so it is susceptible to potential headwinds when the fund rolls futures contracts upon maturity. USO has a 0.45% expense ratio.
“The catch is that the futures curve–the prices of contracts at progressively distant expiration dates–can take an upward slope (known as contango) or downward slope (known as backwardation),” according to Morningstar analyst Abraham Bailin.
If the later-dated contracts cost more than the spot price, or the market is in contango, futures-based ETFs may lose out when they roll to costlier later-dated contracts. [Backwardation and Contango]