ETF Talk: Oil Futures Offer Slick Investment

Lofty oil prices have taken center stage, and the rhetoric is likely to get hot about the issue as we advance toward the presidential election. Although oil prices historically tend to decline during election years, the commodity jumped in price early in 2012 before pulling back in recent weeks. If you think oil prices will remain high and bring huge profits to companies in that industry, a smart investment for you may be United States Oil Fund LP (USO), an exchange-traded fund (ETF) that offers you a pure play on that sector.

 

With an unstable political climate in the Middle East, oil prices have the potential to rise sharply at virtually any time. Prices spiked after Iran threatened to close the Strait of Hormuz, a narrow body of water that transports nearly 40% of the world’s supply of crude oil. After bottoming out at $29.91 last October, USO generally has risen since then to close at $39.03 on April 23.

 

 

 

USO aims to track the movement of West Texas Intermediate light, sweet crude oil delivered to Crushing, Okla. Despite recent price fluctuations, USO trades for a slight premium above its net asset value (NAV) of $38.07. I like to buy closed-end funds such as this one when they trade at or below their NAV, so I personally am not keen to invest in USO right now, but I am watching to see if it pulls back toward its NAV and offers a better entry point than we have today.

 

The United States Oil Fund rises above other oil market ETFs, in my view, because the fund offers a way to hedge crude oil movements and to profit from changing oil prices by the use of futures contracts. The fund’s portfolio consists of listed crude oil futures contracts and other oil-related futures, forwards and swap contracts that are collateralized by cash, cash equivalents and U.S. government obligations with remaining maturities of two years or less.

 

As a result, USO permits commodity-like exposure without using a commodity futures account. Another advantage is that the fund uses light, sweet crude oil futures that are the most actively traded futures contracts and offer a primary benchmark for the broader oil market.

 

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