A top oil ETF will give your portfolio exposure to oil prices. But like all ETFs, you need to choose wisely.
An ETF investment is one of the most popular and most benign investing innovations of our time.
An oil ETF is one option available for investing in oil. An example is the United States Oil Fund, symbol USO on New York. This ETF tracks the swings of oil prices through futures contracts for light sweet crude, which is the primary benchmark used in the U.S.
However, the Resource sector, including oil, is highly volatile, and no one can accurately predict future oil prices.
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How to Make Money with ETFs
Learn everything you need to know in 'The ETF Investor's Handbook' for FREE from The Successful Investor.
ETFs Guide for Canadian Investors: Find the best way to invest in ETFs with low fees, low risk & high satisfaction.
Understanding the background information on oil investing will help you make better stock selections
We continue to advise against overindulging in oil stocks. However, you can profit over long periods by reasonably investing in oil stocks.
Most investors could hold a portion of their portfolios in well-established and well-managed oil stocks, or ETFs that hold those stocks, especially those with high-quality reserves and rising production. These companies are well-positioned to profit during periods of high oil prices, and are able to at least partly offset price declines by producing more oil.
Take these three steps to limit your risk when you invest in oil stocks
- Look at the market cap of oil and gas companies compared to the estimated value of the reserves they have in the ground. Sometimes, a company’s marketing efforts are so successful that they drive the stock up too high in relation to the size of their findings.
- Invest in oil and other energy stocks that own diversified drilling sites in multiple geographic locations where exploration has been successful in the past.
- Buy oil stocks that use innovative new drilling and exploration techniques. Staying ahead of the curve will keep them in business.
Invest in the best oil ETF picks to get the benefit of lower fees
The MERs (Management Expense Ratios) are generally lower on ETFs than on conventional mutual funds. That’s because most ETFs take a much simpler approach to investing. Instead of actively managing clients’ investments, ETF providers invest so as to mirror the holdings and performance of a particular stock-market index.
Look for “traditional” ETFs to find the best oil investing opportunities
We think you should stick with “traditional” ETFs. However, when an investment product faces booming demand as ETFs do today, investment companies try to expand sales by creating new versions of the underlying formula.
These new ETFs use a conventional stock-market index as a base, but add their own refinements. These refinements are tailored to current investor preferences or prejudices. That’s distinctly different from the traditional ETFs, which simply aims to mimic an index. These newer, theme varieties may attract attention—and sales—but they frequently carry higher MERs.
In some cases, the new ETFs may provide investment benefits but not consistently. In fact, it may hurt results in the long run. The worst cases are bad enough to turn investor profits into losses. One sure result is that the higher MERs will cut into the value of your ETF portfolio every year.
Another drawback to the new ETFs is how much easier it is for investors to act on an urge to invest in a specific stock or stock group without doing any messy and time-consuming research. If you want to invest in oil stocks or gold stocks or Swedish stocks or bitcoin stocks, or any of hundreds of other stock groups, you can act on that urge. However, that may not produce the best results.
Don’t miss our advice for investing profitably in oil stocks and other investments in the Resources sector
Our advice for most investors is to maintain some exposure to the oil industry as part of the Resources segment of your portfolio.
Put perhaps half the money you intend to invest in the Resources sector into oil and gas stocks. But only buy these or any stocks if you are prepared to hold them for at least a while.
Above all, when considering how to invest in oil stocks, resist the urge to go overboard, particularly in high-risk oil investments such as junior oils, futures, options and so on. They are as risky as ever, and they may especially fail to thrive in a slow oil recovery.
Also use our three-part Successful Investor approach for all of your investment decisions
- Hold mostly high-quality, dividend-paying stocks.
- Spread your money out across most if not all of the five main economic sectors: Manufacturing & Industry, Resources & Commodities, Consumer, Finance and Utilities.
- Downplay or stay out of stocks in the broker/media limelight.
Some believe the number of oil investors will drop off as socially conscious investing continues to grow. What are your thoughts on this topic?
Have you lost money with oil stocks? What would you recommend for investors looking into the industry?