Plenty of opportunity and challenges await when it comes to investing in crude oil exchange traded funds ahead of the upcoming Organization of Petroleum Exporting Countries (OPEC) meeting on May 25.
On the recent webcast, Drill Into the Future of Oil With Wall Street’s Top Geopolitical Analyst, Helima Croft, Managing Director and Global Head of Commodity Strategy Global Research at RBC Capital Markets, and Simeon Hyman, Head of Investment Strategy at ProShares, touched upon various factors that could affect the crude oil prices, including OPEC and policy changes, and looked to investment opportunities to potentially capitalize on the energy market.
In a survey of webcast participants, 71.3% said they anticipated that OPEC will roll the existing production cuts at its upcoming meeting. Of the other participants, 17.3% said OPEC will not roll the existing production cuts while 11.4% said OPEC will increase production cuts.
Croft said the economic incentive of the leaders of OPEC was to prevent another downturn in oil prices.
Advisors on the webcast were also asked whether or not if they had used crude oil exchange traded products, and if yes, what was their objective. Of the respondents, 19.9% said they did to capitalize on a forecast of crude oil pricing while 19.4% said did as a portfolio diversified. Fifty-five percent answered they had not used them while 3.8% selected other.
Hyman said the portfolio diversifier story is one that isn’t new anymore, adding a very healthy percentage of portfolios include commodities, especially oil, in long-term positions.
“There are real opportunities to take positions outright or to modify longer term holdings in a broader commodity in their portfolio,” Hyman said.
Investors interested in the oil market can consider ProShares’ recently launched ProShares K-1 Free Crude Oil Strategy ETF (BATS: OILK). OILK is an actively managed fund that provides exposure to the West Texas Intermediate crude oil futures market. The fund will include WTI crude oil futures with the three nearest expiration dates, or the front, second and third month contracts, which may help diminish the negative effects of contango.
The oil ETF will also gain exposure to WTI crude oil futures through its ProShares Cayman Crude Oil Strategy Portfolio, a wholly-owned subsidiary of the fund. Since OILK is not structured as a commodities partnership that directly utilizes futures contracts, the new active ETF will not require investors to fill out a K-1 – most commodity futures-based ETFs require K-1s. Instead, investors would only need to fill out tax reporting information on 1099 forms.
ProShares has also recently come out with the ProShares UltraPro 3x Crude Oil ETF (NYSEArca: OILU) and ProShares UltraPro 3x Short Crude Oil ETF (NYSEArca: OILD), the first and only triple leveraged and inverse crude oil-related ETFs, allowing energy traders to obtain geared exposure to the commodity through the efficient ETF investment vehicle.
OILU and OILD will reflect the daily performance that is 3x and -3x, respectively, of the underlying Bloomberg WTI Crude Oil Subindex. The two ETFs will gain exposure to the benchmark by investing in listed futures contracts for West Texas Intermediate sweet, light crude oil futures contracts. The ETFs will also utilize a mathematical approach to investing that determines the type, quantity and mix of investment positions the provider believes should produce daily returns consistent with their 3x or -3x objective.