Best Oil ETFs

Oil is big business, to the tune of 19.69 million barrels. According to data from the U.S. Energy Information Administration, that’s how much the United States uses during one 24-hour period.

The international daily demand for crude oil is also at an all-time high. Data from Statista suggests that each day, the world consumes over 99 million barrels of oil.

Despite the rise of renewable energy research, the demand for oil continues to rise. Experts predict that by the year 2020, the daily demand for oil will exceed over 100 million barrels worldwide, a number that’s about 15 million barrels greater than just 10 years ago.

The need for oil is projected to continue to grow in accordance with the world’s population and the development of third world nations. Naturally, this massive demand has attracted a number of investors.

One of the easiest ways for investors to get a piece of the pie is by investing in an oil exchange traded fund (ETF), a type of fund that collects assets and trades them throughout the day as a sort of “package deal,” much in the same way individual stocks are traded.

We’ve created a list of some of the most profitable oil ETFs currently available on the market, along with risk information that can help you determine if investing in the oil sector is right for you.

Risks and Potential of Investing in Oil

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 this 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” and non-damaging to the environment as possible. From fuel stabilizers that helps oil maintain its chemical structure during periods of disuse to anti-gel diesel additives that prevent freezing, to ethanol-free gasoline that limits emissions, technology has made oil more sustainable than ever before. Some risks that potential investors 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 and, over time, leads to increased instances of climate change. 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 as one of the company’s tankers bled oil into the Gulf of Mexico and devastated the area’s wildlife. The company is still dealing with lawsuits.

Price Volatility

The price of crude oil has dropped significantly since 2015 due to an overabundance of 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.

The Best oil ETFs of This Year

Here are some of the best performing oil ETFs this year. Picks are based on historical performance, expense ratios, and more.

1. Vanguard Energy ETF (VDE)

Vanguard is known as one 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. Though the fund seeks to replicate the performance of the entire energy sector of the United States (and doesn’t focus solely on oil investments), 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)

As its name suggests, 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 seeks to invest in the stocks of the most liquid oil production and distribution companies and leaders of the industry in an attempt 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 of which are futures contracts to buy and sell crude oil that originates from corporations based in the United States.

Because the ETF invests almost entirely in one specific niche of the oil market, it is exceptionally volatile and subject to seasonal and unexpected price fluctuations. 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 one-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 the inclusion of stocks associated with subsidiary industries, including 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., and 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.

Final Thoughts

Though the oil industry shows no signs of slowing down in the coming years, investors should understand that the oil sector has shown losses since 2014 due to an overabundance of crude oil and downward-driven prices.

You can protect yourself against loss by making oil ETFs only a small percentage of your portfolio and balance out your selections with an investment in a total market index fund in case the oil industry continues to deal with oversupply and low prices.

Want to learn more about energy investing? Check out Benzinga’s guides to the best energy ETFs, the best performing energy stocks and the best solar energy stocks

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