How To Invest In Oil Without Buying By The Barrel Using Commodities Futures

If you want to become an oil tycoon without fronting tens millions of dollars for oil exploration, consider the benefits of investing in oil via the futures market. An investment in oil within the context of a broad allocation to commodities with a portion of your assets (no more than 5-10%) can be an excellent way to diversify your typical stock- and bond-heavy investment portfolio. Because you cannot realistically purchase and transport the oil for a profit, you will need to learn how to invest in oil in a simpler way. Oil-based ETFs (or commodities ETFs more generally) offer an easy and convenient way to do this.

Oil ETFs are a way to benefit from the performance of the price of oil without actually owning barrels of the stuff. Some oil ETFs, such as the Vanguard Energy ETF (VDE), invest in oil indirectly buy owning stocks of oil-producing companies such as Exxon (XOM), British Petroleum (BP), and the like while other ETFs invest in oil more directly via oil futures. Probably the safest way to invest in oil is via one of the broad-based oil index ETFs out there, such as the ProShares Ultra DJ-UBS Crude Oil index ETF (UCO).

Why invest in oil ETFs rather than in oil futures directly? For starters, ETFs are managed by professionals who know how to avoid many of the most common caveats of the futures markets (such as forgetting to close out your position before the delivery date and having a thousand barrels of oil dumped on your front lawn). Second, they’re just easier to deal with. You really have to stay on top of things when trading commodities. Do you really want to spend several hours every week tending your futures portfolio when you could be out enjoying life? Me neither. And third, most ETFs use minimal leverage. While that may not sound like a major advantage, many inexperience investors become obsessed with the wealth-building potential of using large amounts of leverage in their investment portfolio, which usually leads to disaster. ETFs take that temptation away, to a certain extent.

For everything you would ever need to know and more about oil ETFs (or mutual funds of any kind, for that matter), I highly recommend signing up for a free account at Morningstar to gain access to some of their excellent tools. Or you can get $20 off a one year subscription for an Annual Premium Membership at Morningstar using the above link.