Big swings in oil trades have attracted more exchange traded fund investors seeking to capitalize on volatility in the energy space. However, potential traders should understand how the investment vehicle work, especially those that track the futures market.
Small investors, pensioners, hobby traders and savers are looking at ETFs designed to track oil price movements, but volatility and the structure of the products make the investments risky for unsuspecting investors, Reuters reports.
Five of the largest oil ETFs have seen assets swell almost fourfold since July to $5.4 billion after oil prices plunged 60% and then rallying by almost a third.
For instance, investors are using the United States Oil Fund (NYSEArca: USO), which tracks West Texas Intermediate oil, and the United States Brent Oil Fund (NYSEArca: BNO) to capture upward momentum in oil prices.
Additionally, traders are looking into geared ETFs that take leveraged position on oil futures, including the ProShares Ultra Bloomberg Crude Oil (NYSEArca: UCO), which takes the two times or 200% daily performance of WTI crude oil, and the VelocityShares 3x Long Crude ETN (NYSEArca: UWTI), which tracks three times or 300% the daily performance of WTI crude. The VelocityShares offering has seen assets jump to $698.4 million at the end of February from $1.6 million at the end of July last year. [Brent ETF’s Rally Could Extend as Speculators up Long Bets]
Previously, those with a high conviction of continued weakness in the energy space utilized inverse ETF options as a way to hedge or capitalize on a weaker energy market. The United States Short Oil (NYSEArca: DNO) tracks the opposite moves of the West Texas Intermediate crude oil futures, DB Crude Oil Short ETN (NYSEArca: SZO) tracks the simple inverse of oil, ProShares UltraShort Bloomberg Crude Oil (NYSEArca: SCO) tries to reflect the two times inverse or -200% daily performance of WTI crude oil, DB Crude Oil Double Short ETN (NYSEArca: DTO) also follows a -200% performance of oil and VelocityShares 3x Inverse Crude (NYSEArca: DWTI) takes the three times inverse or -300% performance of crude oil. [Inverse ETF Plays for a Bearish Oil Outlook]
Carsten Fritsch, senior oil and commodities analyst at Commerzbank, believes the current bounce in oil prices has been supported by a rise in demand for oil derivatives over the past few months.
“It was money flowing into oil ETPs (exchange-traded products) with stocks at record highs and bond yields at record lows,” Fritsch said in the Reuters article.