Want to invest in crude oil? First, understand the differences between crude oil ETFs and other investment methods.

Crude oil is the most active traded commodity globally and the lifeblood of modern economies. For investors looking to enter the crude oil market, choosing the right investment tool is crucial. Currently, there are various options including futures, funds, Crude Oil ETFs, stocks, and options. Among these, Crude Oil ETFs are favored by retail investors for their ease of use and relatively manageable risk. This article will compare Crude Oil ETFs with other investment methods to help you make an informed decision.

What exactly is a Crude Oil ETF?

Crude Oil ETFs were first introduced in 2005 and are exchange-traded funds that track crude oil prices. They do not hold physical oil directly but track oil prices indirectly through investments in crude oil futures or derivatives. In simple terms, you can buy and sell Crude Oil ETFs on the stock exchange just like stocks, with a seamless trading process.

As investment needs diversify, inverse and leveraged Crude Oil ETF products have emerged. These products support 2-3 times leverage for long or short positions, with 2x leverage being the mainstream. Currently, the US hosts the largest scale of inverse and leveraged ETFs globally. Inverse ETFs move opposite to the index, providing investors with more trading options.

What are the core advantages of Crude Oil ETFs?

Investing in Crude Oil ETFs offers several clear advantages over other methods:

Easy trading and risk diversification: No need to open separate futures accounts; you can operate directly within your stock account. Moreover, ETFs are a basket of assets, reducing risk compared to investing in a single oil stock.

High liquidity and short-term opportunity capture: Crude Oil ETFs have much higher liquidity than funds, supporting multiple trades within the same trading day, suitable for capturing oil price fluctuations.

Significant cost advantages: Management fees are usually around 0.3%-0.4%, far lower than the additional costs incurred by futures and stock investments (custody fees, storage fees, insurance). This can save an average of 2%-3% in costs.

More favorable tax treatment: Capital gains tax is only incurred upon sale, resulting in a lighter tax burden.

Flexible two-way trading: Supports both long and short positions, with stop-loss and take-profit settings for risk management.

Crude Oil ETFs also carry risks, beware

Despite many advantages, investing in Crude Oil ETFs also involves risks:

Severe and unpredictable oil price volatility: Global politics and environmental policies greatly influence oil prices. The occurrence of negative oil prices during the pandemic is an extreme example.

More active futures trading: Institutional investors and oil companies tend to prefer futures markets, making ETF trading relatively less active.

High rollover costs and unsuitable for long-term holding: ETFs tracking futures need periodic rollover, which incurs costs, making them unsuitable for long-term holding.

Requires investment experience: Some Crude Oil ETFs track small shale gas companies with weaker risk resistance. In low oil price environments, such companies are prone to bankruptcy, requiring investors to have sufficient experience to discern.

Comparison of Taiwan and US stock Crude Oil ETF products

Main options in Taiwan

Yuanta S&P Oil ETF (00642U) is the only crude oil-related ETF product in Taiwan. It tracks the S&P Goldman Sachs Crude Oil ER Index, with a correlation of 0.923 to spot oil prices. Issued by Yuanta Investment Trust, management fee is 1.00%, custody fee 0.15%, latest price is NT$14.87.

JKo Bright Oil 2X (00715L) is Taiwan’s first leveraged ETF tracking Brent crude oil, providing 2x positive performance. Its underlying index is the S&P Goldman Sachs Brent Oil Daily Return 2x ER Index. Management fee and custody fee are 1% and 0.15%, respectively. The latest price is NT$11.79. Suitable for investors bullish on Brent oil prices.

More options in the US market

Global X’s MLPI (MLPX) tracks midstream oil and natural gas pipeline companies. Management fee is 0.45%, annual dividend yield is 10.1%, assets under management are $506 million, latest price is $7.59. Major holdings include TC Energy, Enbridge, and Williams Companies.

iShares Global Energy ETF (IXC) tracks large global energy stocks. Management fee is 0.46%, annual dividend yield is 11.88%, assets under management are $690.8 million, latest price is $18.41. Top holdings include ExxonMobil, Chevron, and Total.

Energy Select Sector SPDR Fund (XLE) is issued by State Street SPDR and consists solely of US companies. Management fee is only 0.13%, annual dividend yield is 15.57%, assets under management reach $8.331 billion, latest price is $34.62. Major holdings include Chevron, ExxonMobil, and ConocoPhillips.

Other crude oil investment methods: each has its strengths

Besides Crude Oil ETFs, investors have multiple options:

Crude oil futures are the most direct trading method besides spot buying, with extremely high liquidity but also high volatility. WTI and Brent are the most popular varieties. Due to large contract sizes and high thresholds, they are not suitable for retail investors.

Crude oil stocks require in-depth research into company production potential, financial performance, and industry landscape. Major companies include Sinopec, ExxonMobil, Royal Dutch Shell, BP, and Total. This approach demands strong fundamental analysis skills.

Crude oil options are similar to futures but offer insurance mechanisms. Investors can choose to close positions without settlement, paying only the premium. For example, when oil is $30/barrel, buying June $40 call options with a premium of $0.1. If June oil prices reach $45, exercising the option yields a profit of $4,900; otherwise, the loss is limited to the premium paid.

Crude oil CFDs allow leveraged trading with margin. For example, with a 5% margin requirement, a $50 deposit can open a position worth $1,000, with the rest provided by the platform. CFDs are not bound by standard futures lot sizes, with minimum units as low as 10 barrels, and relatively low trading costs. However, high leverage products carry significant risks, requiring setting stop-loss and take-profit orders.

How to develop an investment strategy for Crude Oil ETFs?

Diversify to respond to market changes

If you already hold multiple long positions in oil stocks, you can sell Crude Oil ETFs for hedging. Conversely, use ETFs to stabilize your overall oil exposure.

Use inverse ETFs for short hedging

For those wanting to short crude oil but limited by margin or account restrictions, inverse ETFs are an alternative. But beware, inverse ETFs are extremely risky; a rebound in oil prices can wipe out your investment. Always assess your risk tolerance before investing.

Choose products issued by large, reputable institutions

When investing in Crude Oil ETFs, prioritize products issued by large, well-researched institutions. These are more sensitive to oil price movements and offer better capital security. Also, pay attention to the tracking index to avoid blindly following trends.

Overall, Crude Oil ETFs combine some advantages of futures trading with lower risk of liquidation and more accessible entry points, making them a high-quality tool for retail investors to participate in the crude oil market. Regardless of the method chosen, always align your decision with your risk appetite and market conditions.