Why Invest In Oil ETFs?

Exchange-traded funds (ETFs) are investment vehicles that are traded through listed exchanges (e.g. New York Stock Exchange), much in the way the common stock of publicly-traded companies trade. ETFs are also like mutual funds in that an individual ETF will hold several different assets, such as shares of common stock, bonds, and physical assets. Unlike mutual funds, ETFs trade throughout the day at their market price. Individuals using common discount brokerage firms such as Charles Schwab or Fidelity can buy and sell shares of these ETFs as they please!

Most ETFs are created to track a particular investment index, such as the Dow Jones Industrial Average or S&P 500. In theory, a well-managed ETF will advance or decline in value in proportion to the movement of its underlying index. Some ETFs are actually designed to double or even triple the movement of an underlying index. For example, the ProShares Ultra DJ-AIG Crude Oil ETF (Symbol: UCO) attempts to gain $2 for every $1 that the Dow Jones AIG Crude Oil Sub-Index SM (UCO's underlying index) gains.

ETFs are an essential component to the sophisticated investor's portfolio. They provide diversification by allowing an investor to spread his investment across a variety of companies, asset classes, and geographical locations. As the future of the U.S. economy continues to hang in doubt, ETFs offer American investors a fantastic way to expose their portfolio to lucrative emerging markets, foreign currencies, and physical commodities. ETFs are cheap compared to their mutual fund brethren, costing the investor an upfront commission to his broker (~$8 for a discounted broker) and a small management fee built into the price of the fund. And best of all, the investor can buy and sell his shares in an ETF on the whim, unlike bulky mutual funds that are not as easily unloaded.

Investment in oil has traditionally been used as a safe haven against inflation, political instability, and sub-par returns in the equity markets. After last summer's historic run to ~$150 per barrel, the price of oil has cooled off substantially, allowing a wonderful opportunity for investment should the price of oil surge again. According to Peak Oil theory, petroleum extraction will eventually (or may actually have) reach a maximum rate, meaning that further demands in oil demand (especially from the emerging countries) will spike its price. Even if the Earth contains plentiful oil, if we can't extract it fast enough to appease the power demands of the world, its price will rise.

A weakening dollar vis-a-vis inflation would cause an increase in the price of oil, as well, since the price of oil is quoted in U.S. dollars. With Congress spending money as fast as it can be printed, the likelihood of a future inflation remains almost certain. When that day comes, oil will become more expensive and those investors who protected their portfolios with Oil ETFs will smile.

Some Oil ETFs that may be appealing:

United States Oil ETF (Symbol: USO)

iPath S&P GSCI Crude Oil Total Return Index ETN (Symbol: OIL)

ProShares Ultra DJ-AIG Crude Oil ETF (Symbol: UCO)