Profit from the Oil Industry with ETFs
Are ETFs the best way of speculating on the oil industry, and what makes them so effective?
There’s no doubt that speculation on oil prices is one of the world’s most popular methods of investment, and there are an incredible number of ways of doing it. If you’re new to the market, then you’re probably considering the best ways of profiting from the industry. The simple fact is, ETFs are the best way of getting a broad scope of the oil industry into your portfolio. You can simply trade crude oil prices alone, but this won’t necessarily account for a lot of other things, such as the performance of individual companies or refineries.
The Benefits of ETFs
As with a lot of other investment products, ETFs mean that you don’t actually have to own the underlying commodity; essential when we’re talking whole barrels of oil. The ETF that you choose could contain all manner of different oil related instruments, from oil company stocks to oil indexes. The USO (United States Oil) ETF for instance, is comprised of a great many instruments including futures and options.
The ability to invest in a portion of the oil industry as a whole is the primary attraction of ETFs. If you wanted to do this through other means, you’d have to search for and invest in a great number of areas, making things difficult to keep track of. An ETF, depending on the one you choose, means everything you need is contained within one package.
If you’re looking to compare ETFs with other methods of investment, then the main thing to think about it is the fact that ETFs are extremely tax efficient. This is because capital gains tax is not paid on the transactions when the fund meets an investor’s redemption. If you file taxes online there are some great software packages available to sort through the complexities of investment decisions.
Oil ETFs are often used as a way to hedge other investments. You could, for instance, sell an oil ETF in order to hedge your investments in a country which is heavily reliant upon a successful oil industry.
ETFs Are Not Always the Easy Option
Just as with every other product on the market, you absolutely have to do you research before making a decision. This is because all ETFs will perform differently. You might have a general idea about how the price of oil is currently performing, and know what position you want to take, but that doesn’t mean that every ETF will behave as you expect.
Some investors might think that an ETF is an easy way to diversify your portfolio within the oil industry, which is true to a certain extent, but you still need to make sure you understand the components of the fund, and are aware of how it behaves and what influences it. Failing to do so is like blindly investing in countless different areas.
While ETFs can be a low cost option, other products such as contracts for difference by CMC Markets are more accessible due to leverage, though they are high risk.