Oil Exchange Traded Fund (ETF)

By: EconomyWatch   Date: 23 November 2010

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An Oil Exchange Traded Fund, also referred to as Oil ETF, is an exchange traded fund that invests in companies that are engaged in the business of discovering oil and gas reserves and processing, distribution and retail of their products. The Oil ETFs are also set up as commodity pools, where investment is made in derivatives contracts such as the futures and options. Such an oil exchange traded fund involves limited partnership interests instead of shares.

 

How is an Oil ETF Traded?

In oil ETFs, the benchmark target might be the market index of oil companies or even the spot price of crude oil. Such funds may be specific to the companies of a single country or may be invested in any companies across the world.

For example, the oil ETFs investing in the US based companies are highly popular among investors. The US oil fund is a commodity pool, where investment is made in crude oil futures. It is operated as a limited partnership. In this partnership, the general partner is the California-based company Victoria Bay Asset Management, LLC. This company is a subsidiary of WainwrightHoldings Inc. For tax purposes, this fund is treated as a limited partnership.

The price of every oil exchange traded fund is similar to the price of a crude oil futures contract. In the European markets, an oil ETF exists for the Brent crude. Such exchange traded funds are traded on the International Petroleum Exchange in London. The West Texas Intermediate ETF dealings are conducted on the New York Mercantile Exchange.

 

Oil ETFs: Benefits and Disadvantages

Oil holds a highly significant position among the various commodities traded in the modern world. Hence, investors view oil ETFs as an attractive option. Besides, oil ETFs are backed by futures contracts of crude oil, they enjoy high liquidity.

However, the dependence of oil ETF upon the efficiency of the arbitrage makes it slightly risky. A few performance discrepancies have been witnessed in oil ETFs spanning short time frames.

Oil ETFs provide the opportunity to make money from the rise in fuel prices. It is also advisable to hedge in oil, since oilis one of those commodities that are used on daily basis.


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