Which Oil ETF Is Right For You? OIL vs. USO vs. USL

Oil is arguably the most important commodity in the world today. The commodity and its derivatives make their way into essentially every application of modern life, from transportation and gasoline to plastics. Because of its vast applications, oil has also become one of the most heavily-traded commodities on the market, offering investors both the necessary levels of volatility and liquidity needed to make a lucrative trade. And thanks to the rapid expansion of the exchange-traded fund industry, investors now have several ways to gain access to the arguably most useful commodity in the world. Below, we outline the three most popular oil ETFs and which one will fit your investment objectives [for more oil news and analysis subscribe to our free newsletter].

S&P GSCI Crude Oil Tot Ret Idx ETN (OIL)

Quick Stats (1/8/2013)

Barclays iPath’s OIL is one of the most popular options available for investors looking to gain exposure to the lucrative world of crude. Although it is not the largest futures-based oil ETF available on the market, OIL does offer a healthy trading volume with its ADV of 484,124. The fund tracks an index that is designed to reflect the returns that are potentially available through an unleveraged investment in the West Texas Intermediate (WTI) crude oil futures contract plus the Treasury Bill rate of interest that could be earned on funds committed to the trading of the underlying contracts. Because of this unique feature, investors might earn a higher return with OIL than comparable products since it collateralizes its investments with T-bills. It is also important to note OIL’s heavy allocation towards long dated contracts, which may reduce the risk of contango but also may cause the fund to significantly deviate from spot prices.

OIL is Right for You if: You are an investor seeking to gain exposure to oil futures, but want a methodology that can help avoid the adverse effects of contango. 

United States Oil Fund (USO)

Quick Stats (1/8/2013)

The United States Oil Fund is by far the largest and most popular futures-based oil ETP, offering exposure to the price of light, sweet crude oil futures contracts traded on the New York Mercantile Exchange. Since inception in 2006, USO has accumulated over $1.3 billion in total assets. Besides its sheer size, the fund holds the appeal of being one of the most liquid ETFs available, exchanging hands nearly 6.8 million times a day. Additionally, USO maintains its rank as one of the cheapest oil ETFs available on the market with an expense ratio of just 45 basis points. Despite its mass appeal, USO does have several drawbacks: since the fund invests in front-month contracts, it sometimes exhibits severe contango, making it more appropriate for short-term traders [see also 25 Ways To Invest In Crude Oil].

USO is Right for You if: You are an active trader seeking to either speculate on oil’s movements or quickly execute positions in the commodity.

United States 12 Month Oil (USL)

Quick Stats (1/8/2013)

USL is another popular oil ETF, offering exposure to oil prices through futures contracts, but with a slight twist. USL invests in the next twelve months’ contracts, allowing the fund to reflect the average price of a light, sweet crude oil contract over the coming year. Because the fund is diversified across many maturities, USL is less likely to succumb to contango than its competitors. Thanks to the fund’s unique methodology, USL has been gaining popularity among investors. Since its debut in 2007, this ETF has accumulated over $100 million in total assets and currently maintains an ADV of just under 18,000 [see also What Is Brent Oil? The Ultimate Beginner’s Guide].

USL is Right for You if: You are an investor looking to achieve oil exposure, but want to diversify your holdings across futures contracts of different maturities. 

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Disclosure: No positions at time of writing.

About Daniela Pylypczak

Daniela Pylypczak-Wasylyszyn is a regular contributor to CommodityHQ.com, where she primarily focuses on commodity producers equities. She is also an analyst for ETFdb.com, where she contributes articles and analysis each week. Since joining the team in 2011, Daniela has quickly grown to be one of the most widely-followed authors in the industry. Her articles are syndicated in a number of online publications, including Financial Advisor Magazine, Fidelity.com, and Yahoo! Finance. Daniela is also a contributor for TraderHQ.com and Dividend.com. Daniela graduated from DePaul University with a bachelor’s degree in finance and economics.
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