How Major Oil ETFs and ETNs Can Help Hedge Against Investment Risk
An oil exchange-traded fund (ETF) or an exchange-traded note (ETN) can be added to your investment portfolio to gain exposure to oil as a commodity or as a sector. These products can also help to hedge your oil risk vulnerability from other holdings—a few of the funds provide inverse exposure to indexes that track the performance of large U.S. oil and gas companies. In other words, these inverse ETFs are likely to be up when oil stocks are down.
In general, ETFs and ETNs can have several benefits for your portfolio. Below, you'll find a list of products to point you in the right direction, but make sure to further research the funds before deciding if any of these assets should be a part of your investing strategy.
ETFs vs. ETNs
Both ETFs and ETNs are structured similarly to mutual funds. The investment product is composed of a pool of underlying securities that track a related index. Unlike mutual funds, ETFs and ETNs trade on exchanges like stocks. Their prices will fluctuate throughout the trading day, and investors can buy or sell shares anytime the markets are open.
Like mutual funds, both products will have expenses or fees related to their professional management. However, these costs will usually be lower than those of a comparable mutual fund.
As an example of these lower costs, the capital gains on ETFs and ETNs will only be assessed when you sell shares. Mutual fund investors will incur taxes based on the trading activity of the mutual fund, rather than how an individual trades their shares in the mutual fund.
The primary difference between an ETF and an ETN is that the underlying ETN basket is made up of unsecured debt securities. That means ETNs face both market risk and the credit risk of the investment bank issuing them, whereas ETFs only face market risk. ETNs also are less liquid than ETFs.
Major Oil ETFs and ETNs
The following list includes a selection of funds and notes that are actively trading. This list is current as of May 1, 2020, but make sure to do your own research, as well. ETFs and ETNs are constantly in flux, so a product here may have since changed its name, ticker symbol, goals, holdings, or it may have been removed from the market altogether.
As mentioned above, not all of these ETFs and ETNs track oil indexes directly. Some are inverse products, which essentially short the underlying index. Others are leveraged products, which seek to outperform the underlying index by 2x or 3x its daily returns, which can be very risky.
Always check an ETF's goals and holdings before adding it to your portfolio.
- USO: United States Oil Fund ETF
- USL: United States 12 Month Oil Fund ETF
- DBO: Invesco DB Oil Fund ETF
- UCO: ProShares Ultra Bloomberg Crude Oil ETF (2x)
- SCO: ProShares UltraShort Bloomberg Crude Oil ETF (-2x)
- FRAK: VanEck Vectors Unconventional Oil & Gas ETF
- OIH: VanEck Vectors Oil Services ETF
- DDG: ProShares Short Oil & Gas ETF (-1x)
- OIL: iPath Series B S&P GSCI Crude Oil Total Return Index ETN
- BNO: United States Brent Oil Fund ETF
- DUG: ProShares UltraShort Oil & Gas ETF (-2x)
- OLEM: iPath Pure Beta Crude Oil ETN
- OILX: ETRACS S&P GSCI Crude Oil Total Return Index ETN
- DRIP: Direxion Daily S&P Oil & Gas Exp. & Prod. Bull and Bear 2X Shares ETF (-2x)
- GUSH: Direxion Daily S&P Oil & Gas Exp. & Prod. Bull and Bear 2X Shares ETF (2x)
- CRAK: VanEck Vectors Oil Refiners ETF
- OILK: ProShares K-1 Free Crude Oil Strategy ETF
- FTXN: First Trust Nasdaq Oil & Gas ETF
The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.
Office of Investor Education and Advocacy. "Mutual Funds and ETFs: A Guide for Investors," Page 8. Accessed May 1, 2020.
Fidelity Investments. "ETF vs. Mutual Funds: Cost Comparison." Accessed May 1, 2020.
Office of Investor Education and Advocacy. "Investor Bulletin: Exchange Traded Notes." Accessed May 1, 2020.
Fidelity Investments. "Exchange-Traded Notes." Accessed May 1, 2020.
Office of Investor Education and Advocacy. "SEC-FINRA Investor Alert on Leveraged and Inverse ETFs." Accessed May 1, 2020.