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Everyone knows oil is big business. According to data from the U.S. Energy Information Administration, the United States used around 18 million barrels of oil every day in 2020. The international daily demand for crude oil is at an all-time high, and data from Statista suggests the world consumes over 99 million barrels of oil every day.
Despite the rise of renewable energy research, the demand for oil continues to grow. Experts predict that daily demand for oil will exceed over 100 million barrels worldwide. That’s about 15 million barrels greater than just 10 years ago.
The need for oil is projected to grow in accordance with the world’s population and the development of 3rd world nations. And this demand has attracted a number of investors.
Get a piece of the pie is by investing in an oil exchange traded fund (ETF). An ETF is a type of fund that collects assets and trades them throughout the day as a sort of “package deal” — in much the same way individual stocks are traded. Therefore, an oil ETF focuses on the oil industry and everything related to it.
Check out our list of some of the most profitable oil ETFs on the market to see if the oil sector is right for you.
Oil ETF Movers
Benzinga compiles a list of oil ETFs on the move every day. Check out oil ETF movers we're watching so that you can get in on the action at the right time.
Risks and Potential of Investing in Oil ETFs
Some of the benefits that have attracted investors to the oil industry include:
- High international demand. A large percentage of the world depends upon oil to create energy, and all signs point to aggressive future demand. The United States produces over 35% of its energy through coal and oil, and the International Energy Association has projected increases in demand across the globe, particularly in Japan, Poland and Turkey.
- Strong ROIs. Oil and gas projects are often subsidized through tax advantages, which allow oil manufacturers, refiners and producers to pass more of their profits along to investors in the form of returns and dividends.
- Cleaner and greener fuel additives. Oil and gasoline companies have taken steps to make oil burning as “clean” as possible. From fuel stabilizers to ethanol-free gasoline that limits emissions, technology has made oil more sustainable than ever .
Some risks you need to consider:
- Environmental concerns. Even “clean” gasoline and oil severely damages the environment when burned. Burning natural gas and oil expels carbon dioxide into the air, a chemical that has been found to degrade the ozone layer. This leads to increased instances of climate change over time. Demand and tax credits for the creation and use of geothermal, wind and solar energy is high and has undercut the price of crude oil for years.
- Spill risks. Accidents and oil spills aren’t just bad PR — they can also cause stock prices to tumble as faith in the company drops. In the wake of the Deepwater Horizon oil spill in 2010, British Petroleum’s stock dropped over 55% in a matter of days. The company is still dealing with lawsuits.
- Price volatility. The price of crude oil has dropped significantly since 2015 due to high supply and ease of extraction. Natural gas is also infamous as a seasonally-volatile commodity as prices rise in the winter and freefall in the warmer months. This volatility can pose a significant risk to both short- and long-term savings goals.
Top Oil ETFs by AUM
Here are some of the best performing oil ETFs. Picks are based on historical performance, expense ratios and more.
1. Vanguard Energy ETF (VDE)
Vanguard is known as 1 of the world’s most prolific providers of low-cost total market index funds, but the company also offers a number of industry-specific ETFs.
The Vanguard Energy ETF is a passively managed fund that tracks the MSCI US IMI Energy 25/50 index. The fund seeks to replicate the performance of the entire energy sector of the United States and doesn’t focus solely on oil investments. But the ETF’s largest holdings are in Exxon Mobil, Chevron and the Occidental Petroleum Corporation.
As is standard for most of Vanguard’s funds, fees are low with an expense ratio of just 0.10%. The Vanguard Energy portfolio is also available as an Admiral’s Class mutual fund for major investors who are interested in investing at least $100,000 in exchange for lower fees.
2. VanEck Vectors Oil Services ETF (OIH)
The VanEck Vectors Oil Services ETF focuses entirely on the oil industry of the United States by tracking the MVIS U.S. Listed Oil Services 25 Index.
The fund invests in the stocks of the most liquid oil production and distribution companies and leaders of the industry in to limit the effects of the volatile nature of the oil market.
The fund has over $926 million in holdings contained within just 25 funds, but fees are low at just 0.35%. Shares of the VanEck Vectors Oil Services ETF are suitable complements for both short- and long-term investors but should be balanced out with shares of a total market index fund to limit risk.
3. United States Oil Fund (USO)
The United States Oil Fund is an inexpensive ETF that tracks the price of West Texas Intermediate Light Sweet Crude Oil.
The fund holds about $1.6 billion in assets. The vast majority are futures contracts to buy and sell crude oil from corporations based in the United States.
The ETF invests almost entirely in 1 specific niche of the oil market, so it is exceptionally volatile and subject to seasonal and unexpected price fluctuations. At the same time, this makes the fund easy to research because you know the oil it tracks. You’ll want to use the United States Oil Fund as only a small percentage of your overall portfolio — especially if you’re close to retirement.
4. iShares U.S. Oil & Gas Exploration & Production ETF (IEO)
The iShares U.S. Oil & Gas Exploration & Production ETF tracks the Dow Jones U.S. Select Oil Exploration & Production Index, which invests heavily in U.S.-based securities involved in the production and processing of natural gas and oil and new domestic oil exploration opportunities.
The fund has over $410 million in holdings and sees an average daily trading volume of over 300,000 shares. Some of the fund’s top holdings include major domestic oil producers like ConocoPhillips, Marathon Petroleum Corporation and Phillips 66 — all of which have seen positive 1-year returns of over 7%.
With an average expense ratio of 0.43%, the iShares U.S. Oil & Gas Exploration & Production ETF offers great exposure to the domestic oil market.
5. SPDR S&P Oil & Gas Equipment & Services ETF (XES)
The SPDR S&P Oil & Gas Equipment & Services ETF tracks the S&P Oil & Gas Equipment & Services Select Industry Index and currently has about $286 million in assets.
The fund is unique because instead of investing exclusively in the largest oil and gas extraction companies in the United States, the fund also seeks to balance out its portfolio with stocks associated with subsidiary industries like construction and drilling equipment manufacturers.
Some of the fund’s largest holdings are in the ProPetro Holding Corporation, the Keane Group Inc. and RPC Inc. The fund attempts to weight small-, mid- and large-cap stocks equally for a more diverse portfolio offering.
This makes the SPDR S&P Oil & Gas Equipment & Services ETF a less risky option when compared to other oil ETFs on the market.
6. ProShares Ultra Bloomberg Crude Oil (UCO)
ProShares Ultra Bloomberg Crude Oil tracks the Bloomberg WTI Crude Oil index. It aims to double its daily movements. So if WTI gains 50 points in a single day, UCO should move up 100 points.
UCO uses futures contracts across the New York Mercantile Exchange (NYMEX) and Intercontinental Exchange (ICE) exchanges to track the price of WTI.
7. Invesco S&P SmallCap Energy ETF (PSCE)
Invesco’s S&P SmallCap Energy tracks the S&P SmallCap Energy index. It focuses on smaller energy companies listed in the U.S.
PSCE is more diverse than just oil. In fact, 6% of its holdings are in Renewable Energy Group. But this ETF offers exposure to many small-cap oil and gas companies like SouthWestern Energy and Range Resources.
Invest in Oil Today
The oil industry shows no signs of slowing down in the coming years, and investors should understand that the oil sector has shown losses since 2014 due to overabundance and downward-driven prices. As you can see, each oil ETF has its own pros and cons, allowing you to choose an aggressive or conservative approach to oil investment.
You can protect yourself against losses by making oil ETFs only a small percentage of your portfolio. Balance your selections with an investment in a total market index fund in case the oil industry continues to deal with oversupply and low prices.