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Author: admin, 02.08.2014. Category: Small Goals 2016

Before we talk about a few of the oil ETFs (exchange traded funds) on the market, I would be remiss if I didn’t give you a few words of warning. Later, once oil prices stabilized, we found out that oil didn’t rise on true market fundamentals but instead, did so because oil speculators drove the price up.
The point is this: understand that playing oil and many other commodities is done successfully by professional traders and those who commit themselves to playing the commodity market. Now that I’ve warned you, let me tell you that in a diversified portfolio, playing oil technically (by using a chart study) can yield reasonable results when using a quasi swing trading strategy. If you want to play oil through ETFs, understand that most oil and gas ETFs track the price of futures contracts. Before we look at oil ETFs to consider, let’s look at the index we’re going to use for comparison purposes. Disclosure: I have a long position in Marathon (MRO) along with covered calls sold against the position as both a hedge and an additional revenue stream.
These ETFs that attempt to track the price of commodities through futures contracts typically do a poor job of it.
If something gets too complex it’s always a sure signal for any investor to be wary of the investment. I treat Oil as a purely speculative play, but I have done so using USO several times over the past years.
Over the very long run, I think oil prices can only go up as it becomes more scarce and more expensive to extract.

Speculators are still alive and well in the commodities market and for anybody trying to play oil on market fundamentals, there are variables that are both hard to control and hard to forecast.
Unlike gold ETFs and other commodity funds, it’s not practical for these funds to hold oil or gas. When we’re talking about stock performance, we look at the S&P 500 or the Dow Jones Industrial Average.
It’s a pure play on oil that tracks the performance of the spot price of West Texas Intermediate light, sweet crude oil delivered to Cushing, Oklahoma. Instead, it tracks another oil index, Dow Jones – AIG Crude Oil Sub-Index which tracks crude oil futures. As you can see, it has almost perfect correlation but this is largely due to the fact that they track the same companies. In fact, this may be the more desirable way since other variables that you can account for will affect the stock’s price along with oil prices. All of us were wondering how the price of oil could possibly go up that fast and that dramatically. This is a lot of jargon that describes a fund that tracks the price of crude oil through futures contracts. To be painfully simple, SCO tracks an index that tracks oil futures so this ETF simply adds one more confusing layer to the mix.
Yes, showing a chart of a short ETF shouldn’t change our premise since our first two ETFs are correlated to the same thing.

You can research past earnings, CEO performance, and how the company reacts to changing oil prices.
Not only were we all hating a trip to the gas station, but everything in our lives that used oil as fuel (most everything) went up dramatically. Comparing to the oil futures is difficult because of the varying prices from month to month. If all you are looking for is a way to play the price of oil, then this may be one of your best options (although I’m not making any buy or sell recommendations). In this case, for the period ending October 29, 2010, USO has not been a good way to play oil. In fact, with this fund, when the price of oil drops by 1%, you make 2% (minus fees) thereby making this a leveraged inverse ETF. Instead, much like the XOI index, the XLE tracks the performance of companies in the business of oil and gas. There are other areas of the market that are much more favorable to the part time investor.

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