Oil exchange-traded funds (ETFs) offer direct access to the oil market by tracking the price of oil as a commodity. This approach is different from investing in funds that own a portfolio of oil stocks. There is potential for significant returns through investing in the oil sector, but the risks remain high due to the rising probability of a sharp economic slowdown or an recession. Oil prices sharply spiked following Russia’s invasion of Ukraine earlier this year, although they have since fallen to below pre-invasion levels.
Oil prices historically have been prone to quick, dramatic swings up and down. Oil ETFs provide investors a straightforward way to gain exposure to those price swings without having to buy and store the physical commodity or navigate the complexities of investing in oil futures contracts.
Key Takeaways
- Oil prices have dramatically outperformed the broader stock market over the past year.
- The oil exchange-traded funds (ETFs) with the best one-year trailing total return are BNO, OIL, and USO.
- The top holdings of the first of these ETFs are futures contracts for Brent Crude oil, and the top holdings for the second and third are futures contracts for West Texas Intermediate (WTI) sweet light crude oil.
There are six distinct oil commodity ETFs that trade in the United States, excluding inverse and leveraged ETFs as well as funds with less than $50 million in assets under management (AUM). Oil prices, as measured by the Bloomberg Composite Crude Oil Subindex, have climbed by 52.1% over the past 12 months, significantly outperforming the S&P 500’s total return of -11.0%, as of Sept. 1, 2022.
The best-performing oil ETF, based on performance over the past year, is the United States Brent Oil Fund LP (BNO). We examine the top three oil ETFs below. These ETFs focus on oil as a commodity rather than oil company stocks. All numbers below are as of Sept. 2, 2022.
- Performance Over One-Year: 54.1%
- Expense Ratio: 1.09%
- Annual Dividend Yield: N/A
- Three-Month Average Daily Volume: 645,657
- Assets Under Management: $214.0 million
- Inception Date: June 2, 2010
- Issuer: Marygold Cos, Inc.
BNO is structured as a commodity pool, a private investment structure that combines investor contributions to trade the futures and commodities markets. BNO’s aim is that daily percentage changes in its shares’ net asset value (NAV) are mirrored in fluctuations in the spot price of Brent Crude oil. The spot price of Brent is measured by movements in the price of the BNO’s Benchmark Oil Futures Contract. The ETF’s benchmark is a near-month futures contract that is traded on the ICE Futures Exchange. Because Brent Crude often trades at a different price from West Texas Intermediate (WTI), BNO can be a useful way of gaining alternative exposure. Its primary holdings are Brent Crude oil futures contracts. BNO may also invest in forwards and swap contracts.
- Performance Over One-Year: 46.3%
- Expense Ratio: 0.57%
- Annual Dividend Yield: N/A
- Three-Month Average Daily Volume: 57,612
- Assets Under Management: $103.3 million
- Inception Date: April 20, 2011
- Issuer: Barclays Capital
OIL is structured as an exchange-traded note (ETN), which is an unsecured debt security that trades like a stock. OIL targets the Barclays WTI Crude Oil Pure Beta TR Index. The index mirrors the returns through an unleveraged investment in futures contracts in the crude-oil market. The Index may combine several contracts with different expiration dates. OIL’s sole holding is futures contracts of WTI sweet light crude oil. The ETF is heavily exposed to futures contracts that expire in one year, which reduces the short-term risks of contango. Note that on March 14, 2022, Barclays announced it had suspended any further sales from inventory and any further issuances of OIL due April 18, 2041, because of insufficient issuance capacity. Barclays said that any redemptions by the ETN’s holders won’t be affected, and the company said it plans to reopen sales and issuances as soon as it can accommodate added capacity. Some investors said the move could cause major movements in the ETN’s price.
- Performance Over One-Year: 45.9%
- Expense Ratio: 0.81%
- Annual Dividend Yield: N/A
- Three-Month Average Daily Volume: 4,521,562
- Assets Under Management: $2.1 billion
- Inception Date: April 10, 2006
- Issuer: Marygold Cos, Inc.
Like BNO, USO is structured as a commodity pool. USO targets a benchmark futures contract that is the near-month WTI crude oil futures contract for light, sweet crude oil delivered to Cushing, Oklahoma. The contract is traded on the New York Mercantile Exchange (NYMEX). USO invests in other oil-related contracts, and may invest in forwards and swap contracts. The ETF is often subject to severe contango, making it a more appealing investment for short-term investors. The sole holding of USO is futures contracts of WTI sweet light crude oil.
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