USO was the first Oil ETF to offer investors exposure to crude oil when it was introduced on April 10 in 2006. Other issuers followed suit with their own oil ETFs as USO proved a popular alternative to trading oil futures. Obviously, not all oil ETF products are created equal; we will take a look below at several OIL ETF products that were subsequently introduced and compare their performance relative to each other and to West Texas Intermediate (WTI) light sweet crude oil prices. WTI is the primary US benchmark for crude oil. Since oil prices are sensitive to geopolitical events and the state of the global economy affecting supply and demand, oil ETFs have provided investors and traders alike with opportunities to profit from the price volatility.
USO – United States Oil Fund, LP ETF (NYSEArca: USO)
USO 36.52 [-0.35]
Average Volume: 8843270
Yield: N/A
MER: 0.76% (0.45% management fee + 0.31% futures brokerage expenses)
The USO Oil ETF is designed to reflect the performance of the spot price of WTI light sweet crude oil minus USO’s expenses. Any change in % terms in the WTI spot price is theoretically mirrored by the same % change in USO’s net asset value per unit. The fund primarily invests in crude oil futures contracts and other oil related futures, forwards, and swap contracts. The fund inception date is 2006-04-10 which makes it the first oil etf to see the light. USO is a popular etf with oil investors with average volumes exceeding 10 million shares per day.
USL – United States 12 Month Oil Fund (NYSEArca: USL)
USL 42.65 [-0.41]
Average Volume: 28700
Yield: N/A
MER: 0.94% (0.60% management fee + 0.34% futures brokerage expenses)
The USL Oil ETF shares the same objective with USO as it seeks to track the movements of WTI light sweet crude oil. USL units aim to replicate the % change in the average of prices of 12 futures contracts on crude oil traded on the NYMEX. This fund always holds the next 12 futures contracts simultaneously with equal weightings in each. Every month a contract expires, it is replaced with a new contract 12 months out. For example when February 2011 crude oil reaches expiration the position will be sold and an equal position will be purchased in February 2012.
USL oil ETF was first introduced on 2007-12-06 and even though it proved to track WTI oil prices better than USO oil ETF, it remains surprisingly less popular than USO. Net asset value and trading volume are simply a fraction of USO’s.
USO vs USL
OIL – iPath S&P GSCI Crude Oil TR Index ETN (NYSEArca: OIL)
OIL 23.99 [-0.24]
Average Volume: 837182
Yield: N/A
MER: 0.75%
OIL ETN is an exchange traded note linked to the performance of the Goldman Sachs Crude Oil Return index and reflects the returns that are potentially available through an unleveraged investment in WTI crude oil futures contracts traded on the New York Mercantile Exchange. The fund was first introduced on 2006-08-15 and has provided results very close to USO. It is better to stick to USO oil ETF because your share in an ETF represents a stake in an underlying commodity while in an ETN you have a share in senior debt notes which poses a credit risk if the issuer was to go bankrupt.
USO vs OIL
BNO – United States Brent Oil Fund (NYSEArca: BNO)
BNO 79.386 [-0.224]
Average Volume: 51887
Yield: N/A
MER: 1.00 % (0.75% management fees + 0.25% futures brokerage expenses)
The BNO oil ETF seeks to replicate (minus expense) the daily changes in percentage terms of the spot price of Brent Crude oil. The fund primarily invests in crude oil futures contracts and other oil related futures, forwards, and swap contracts. Brent crude is a key benchmark for world oil prices. WTI prices have become a barometer for oil prices linked to Cushing, Oklahoma storage facility as it is reaching full capacity. Since oil cannot be transported to the Gulf Coast from Cushing for export, WTI prices fell relative to Brent. There has been a persistent spread in prices between WTI and Brent which reached a record of more than $23 per barrel in July of 2011. The fund was first introduced on 2010-06-02 and has been a top performer amongst its peers in 2011.
DBO – PowerShares DB Oil (NYSEArca: DBO)
DBO 27.77 [-0.26]
Average Volume: 510448
Yield: N/A
MER: 0.79% (0.75% management fees + 0.04% futures brokerage expenses)
The DBO Oil ETF is another fund designed to reflect the performance of WTI light sweet crude oil. It tracks the Deutsche Bank Liquid Commodity Index which is composed of futures contracts on Light Sweet Crude Oil (WTI). While the management fee is slightly higher than USO oil etf, DBO delivered a better performance. DBO is the 3rd most liquid oil etf amongst its peers and was first introduced on 2007-01-05. As you can see in the following graph it has successfully outperformed its peers that are tracking WTI pricing especially when oil prices were rising on the back of unrest in the Middle East and the North Africa region.
2011 Oil ETF Performance Comparison
Based on the graph above, you will notice that no ETF will exactly track WTI oil prices and that is mainly because these ETFs do not hold the actual commodity in physical form. Add to that fund expenses and contango effect and you are guaranteed to trail the spot price of oil. This is one reason some investors actually use these ETFs for short term trades and not in a long buy and hold strategy. Contango describes a condition where contracts for a future delivery of a commodity are more expensive that near-term contracts for the same stuff. When a futures contract is about to expire, it has to be rolled over in order to avoid taking delivery of millions of dollars in physical oil which explains why the contract is sold and replaced with a more expensive new one losing money in the process.
New Oil ETFs are being introduced every year will be reviewed and added to this page with time. For now DBO and BNO remain the best Oil ETFs for tracking light sweet oil prices on the WTI benchmark and the Brent benchmark.
Disclaimer: The information provided is as of the date above and subject to change, and it should not be deemed a recommendation to buy or sell any security. Trading involves substantial risk and may not be right for everyone.
