Oil exchange traded funds
Rapid industrialization has brought the world to an energy crisis. The demand for energy has far outstripped the supply. There has been little progress in oil discovery and extraction processes over the last two decades. This led to hike in oil prices by almost 30 percent from 2005 to 2007. And the worst is not over as yet. Even other commodities like copper and aluminum have started showing strength. This has prompted many players like Deutsch Bank, and Ameristock to launch innovative Exchange Traded Funds tracking commodities.
About exchange traded funds:
Basically Exchange Traded Funds (ETFs)
a. Are pooled funds;
b. Track a single commodity or index or bonds or specific class of shares, industry, etc., for generating more focused returns;
c. Use professionals for investment services like mutual fund management;
d. Can be traded on stock markets. Therefore, the price of ETF may exceed that of the underlying asset, because of affordability, tax advantages, or pure speculation;
e. Have lower brokerage charges or commission charges when compared to mutual funds;
f. Facilitate trading and speculation in commodities on stock markets; formerly investors seeking to invest in commodities could only invest through commodity exchanges. They needed large amount of funds as most of commodities like wheat, or silver cannot be purchased in small quantities from these markets. Small purchases are only feasible in retail markets. Therefore investors had to buy in bulk, which entailed storage and insurance costs as well;
g. Facilitate focus on specific commodity. Formerly, an investor seeking to invest in gold would have to buy into industries that extracted and refined and sold the gold. Or jewelers who turned this gold into ornaments. However, investors are now able to invest in pure gold that is inclusive of all such extraction and related administration costs, and speculate on its price instead of being satisfied with what profits the industry or specific company was offering.
Oil exchange traded funds:
Paucity of energy generating resources and lack of technology to economically and effectively tap on nuclear, solar, wind and water energies has helped the prices of oil rise substantially in recent years. This has caught the attention of investors who think there is an opportunity to speculate in this commodity.
Therefore, many investment companies and banks have come up with oil exchange traded funds.
Some of these funds are:
a. American Stock Exchange and Victoria Bay Asset Management launched U.S. Oil Fund in 2006. The ETF tracks prices of West Texas light, sweet crude oil.
Traded on - American Stock Exchange
Ticker USO
b. Deutsche Bank?s DB Commodity Services LLC launched PowerShares DB Commodity Index Tracking Fund. The ETF tracks crude oil among other commodities.
Traded on: American Stock Exchange
Ticker: DBC
c. Barclays Bank PLC launched iPath Exchange Traded Notes that track Goldman Sachs Crude Oil & Standard and Poors? index.
Traded on: NYSE
Ticker: OIL
d. State Street Global Advisors sponsored Energy Select SPDR tracks oil and gas stocks listed on Standard & Poors? index. The stocks included in the fund?s portfolio are Exxon Mobil and Chevron.
Traded on: American Stock Exchange
Ticker: XLE
e. State Street Global Advisor sponsored SPDR S&P Oil & Gas Exploration & Production ETF is based on Standard & Poor?s? index
Traded on: American Stock Exchange
Ticker: XOP
f. State Street Global Advisor?s SPDR S&P Oil & Gas Equipment & Services ETF is also based on Standard &; Poor?s? index of same name.
Traded on: American Stock Exchange
Ticker: XES
g. Barclays Global Fund Advisors launched iShares Dow Jones US Energy, which tracks a combination of oil and gas stocks listed on Dow Jones index. The index has Exxon Mobil and Chevron, among other stocks.
Traded on: NYSE
Ticker - IYE
h. Merrill Lynch sponsored Oil Service HOLDRS (Holding Company Depository Receipts) tracks stocks that are related to drilling, exploration, production and services related to oil and gas industries.
Traded on: American Stock Exchange
Ticker - OIH
ETFs have opened a whole range of options before the investors. Investors can use them for speculation on stock exchanges, even buying and selling for example oil futures, or taking long and or short positions on such commodities. In addition, ETFs can buy shares in companies where insiders become aggressive buyers. Investors can select which oil ETF is greener when compared to the other or plan a regular monthly income through ETF route. These are some of the features that are making ETFs more popular than the traditional shares on the bourses. And more and more ETFs are being launched with innovative ideas in built therein.
ETFs bring in certain level of volatility in the underlying class of assets. Like mutual funds, ETFs are also prone to market risks. Investors, should therefore, invest in ETFs after studying the underlying portfolio, and collating information on each such share or commodity.
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