How to choose crude oil investment? Understand the differences between ETFs, futures, and oil stocks in this article

Crude oil is one of the most actively traded commodities worldwide and a vital pillar of the modern economy. For investors, participating in the crude oil market is no longer limited to a single channel—various methods such as futures, funds, ETFs, oil stocks, options, and more allow you to profit from oil price fluctuations. Among these, Crude Oil ETFs are popular among retail investors due to their trading convenience and lower entry barriers. So, what are the advantages and disadvantages of crude oil ETFs? This article will provide an in-depth analysis of the operating principles, market products, investment alternatives, and risk management strategies of Crude Oil ETFs to help you better understand this financial instrument.

What is the core mechanism of Crude Oil ETFs?

Crude Oil ETFs debuted in 2005, emerging alongside the global economic recovery as innovative financial products. Unlike physical crude oil investments, crude oil ETFs do not store actual oil. Instead, they replicate the price movements of crude oil spot or futures prices through investments in oil futures contracts, forward transactions, swaps, and other financial instruments. This structure allows ordinary investors to participate in oil price movements without dealing with the complexities of the futures market.

Crude oil ETFs are listed and traded on stock exchanges, with buying and selling methods identical to those of regular stocks, offering unprecedented trading convenience. As the market evolved, inverse and leveraged ETF products were developed, enabling investors to take 2x to 3x long or short positions. Currently, the US is the largest market for these leveraged products, providing investors with more flexible asset allocation options.

Overview of global crude oil ETF products

Choices in the Taiwan market

Yuanta S&P Oil ETF (00642U) is the only ETF in Taiwan tracking crude oil-related assets. Issued by Yuanta Investment Trust, it tracks the S&P Goldman Sachs Crude Oil Enhanced Return Index, with a high correlation of 0.923 to the spot oil price. Management fee is 1.00%, custody fee 0.15%. The latest trading price is NT$14.87, making it a primary tool for retail investors to participate in oil price rises or falls.

Another noteworthy product is JKOP BNO2X (00715L), Taiwan’s first 2x leveraged ETF tracking Brent crude oil, issued by iShares. It tracks the S&P Goldman Sachs Brent Oil Daily Return 2x Index, with a fee structure of 1% management fee plus 0.15% custody fee. Its latest price is NT$11.79. Compared to traditional ETFs, leveraged products can amplify returns but also increase risks.

Rich options in the US stock market

The US stock ETF ecosystem for crude oil investment is more mature. Global X MLP & Energy Infrastructure ETF (MLPX), issued by Global X, has a management fee of only 0.45% and an annual dividend yield of 10.1%. It tracks the MLP index composed of oil and natural gas pipeline companies. Major holdings include energy infrastructure giants like TC Energy, Enbridge, and Williams Companies.

iShares Global Energy ETF (IXC) has a management fee of 0.46% and an annual dividend yield of 11.88%. It tracks large global energy companies, with top holdings including ExxonMobil, Chevron, and TotalEnergies—top-tier international oil and gas conglomerates.

Energy Select Sector SPDR Fund (XLE) is the largest in scale, with assets under management of USD 8.3313 billion, a management fee of only 0.13%, and an annual dividend yield of 15.57%. This fund is composed entirely of US energy companies, with a focus on large integrated oil firms like Chevron, ExxonMobil, and ConocoPhillips.

Are there other ways to invest in crude oil?

Besides ETFs, investors can choose other methods based on their risk tolerance.

Futures trading: highest liquidity but highest barriers

Crude oil futures are the most direct form of trading besides spot trading, with extremely high liquidity. WTI and Brent futures are the most mainstream contracts, along with high-sulfur crude and Dubai Sour futures. However, futures trading involves large transaction amounts and high margin requirements, making it unsuitable for small and retail investors. Additionally, oil prices are highly volatile and difficult to predict, risking significant losses for initial traders.

Oil stocks: require deeper fundamental research

Investing directly in oil stocks is another route. Investors need to monitor global oil prices and conduct in-depth research into the production potential, financial health, competitive landscape, and macro energy environment of target companies. Major oil producers include Sinopec (the world’s largest refiner), ExxonMobil, Royal Dutch Shell, BP, and TotalEnergies, each with regional advantages. Compared to ETFs, investing in oil stocks demands higher analytical skills but offers the potential for higher excess returns.

Options trading: a double-edged sword for risk management

Options allow investors to buy or sell crude oil futures at predetermined prices at future dates, similar to purchasing insurance. For example, if the current oil price is $30/barrel and you expect it to rise above $40 in June, paying a premium of $0.1 per barrel gives you the right to buy at that price. Investing $100 (0.1×1000 barrels) grants the right to purchase. If oil prices indeed rise to $45, exercising the option yields a profit of $4,900. Conversely, if prices fall, the investor can choose not to exercise, limiting losses to the premium paid. Due to their complexity, options trading requires strong market understanding and risk awareness.

CFD trading: another leverage option

Contracts for Difference ((CFD)) allow traders to participate in oil price movements using leverage without owning the physical commodity. With margin requirements of 5%-20%, investors can control positions far larger than their capital. For example, with a 5% margin, a $1,000 position in crude oil requires only $50 in margin. CFDs typically do not charge commissions; profits come from price differences, and there are no standard futures lot sizes—trading can be done in 10 barrels rather than 1,000. However, as leveraged products, CFDs carry high risk. Investors must set strict stop-loss and take-profit levels to avoid liquidation.

Why choose crude oil ETFs?

Crude oil ETFs combine multiple advantages, making them a balanced choice for risk and return.

Trading simplicity is the primary benefit. No need to open futures accounts; investors can trade directly on stock exchanges with minimal procedures.

Risk diversification is prominent. ETFs hold a basket of crude oil-related assets, reducing exposure to the volatility of individual stocks. Compared to stocks, ETFs offer higher liquidity, support intraday trading, and facilitate short-term opportunities.

Tax efficiency offers hidden benefits. Capital gains taxes on ETFs are only incurred upon sale, providing greater tax deferral compared to other fund products.

Cost control is significantly better than futures or physical trading. No storage, insurance, or custody fees are involved. Management fees are usually around 0.3%-0.4%, saving 2%-3% on average costs compared to other crude oil investments.

Two-way trading enhances flexibility. Investors can go long or short ETFs, using limit orders and stop-loss strategies to manage risks under different market conditions.

Overall, crude oil ETFs retain some advantages of futures while offering more manageable risk of liquidation. Entry barriers are much lower than futures markets. It is crucial to select large-scale, institutional-backed ETF products, as these have more comprehensive research systems, more accurate oil price trend predictions, and better capital security.

Risks investors must recognize when investing in crude oil ETFs

Returns and risks often go hand in hand. While crude oil ETFs have many advantages, inherent risks should not be overlooked.

Price volatility risk is the primary challenge. International political events, geopolitical conflicts, supply chain disruptions, and climate change can cause sharp oil price swings. The 2020 COVID-19 pandemic even pushed oil prices into negative territory, illustrating this point. Predicting oil prices is extremely difficult.

Trading activity differences also matter. Futures markets have much higher trading volume and open interest than ETFs, making them more suitable for large institutional asset allocation.

Higher experience requirements. Many novice investors lack basic knowledge of oil futures, limiting their risk tolerance. Some crude oil ETFs track US small- and mid-cap shale companies, which are relatively weaker competitors. During downturns, these companies may face bankruptcy, causing ETF net asset values to plummet.

High rollover costs. ETFs tracking oil futures often need frequent contract rollovers, which incur costs and reduce returns over time. They are not suitable for long-term static holding.

Strategies for investing in crude oil ETFs

Diversified portfolio allocation

Crude oil ETFs can be traded flexibly like stocks, offering various portfolio strategies. To maintain a stable crude oil exposure, investors can sell part of their ETF holdings to hedge downside risk; similarly, holding long positions in multiple oil stocks can be balanced by selling ETFs to adjust risk dynamically.

Inverse ETF strategies

Investors can also choose inverse crude oil ETFs to track the opposite movement of oil prices. For those interested in shorting but limited by margin or account restrictions, inverse ETFs are convenient tools. However, inverse ETFs carry high risks—while they can hedge losses and profit during oil price declines, a rebound in prices can lead to substantial losses. Investors must carefully assess their risk tolerance before investing.

In summary, the crude oil market is full of opportunities but also hidden challenges. Whether choosing ETFs, futures, stocks, or derivatives, investors should make informed decisions based on their risk preferences and knowledge base. Continuous learning, cautious operation, and strict stop-loss measures are key to long-term survival in crude oil investing.