Are Oil ETFs Worthwhile Investments?

Oil ETFs are a worthwhile investment for investors who are looking to benefit from adding a commodities component to their portfolios without necessarily investing in oil or oil futures directly. Being in an oil ETF reduces some of the risk exposure to the investor, relative to being in oil. It should be understood however that all investing involves risk and investing in any exchange traded fund, or ETF, can result in possible loss, including the loss of principal investment amount.

Exchange Traded Fund Objectives

Exchange traded funds facilitate the receipt of returns that are designed to mirror those of the index that the follow. In the case of oil ETFs the underlying index for different oil futures would be the ETFs basis. ETFs emulate returns and may from time to time outperform the underlying index in which it mirrors. It is also possible for the ETF to do worse than the returns of its underlying index as well as ETFs are subject to the same loss potential as any investment.

Decision to Invest

The decision to invest in an oil ETF is based on the investment goals and objectives that you have as an investor and nothing else. Depending on what you are looking to accomplish with your investment capital, oil ETFs may help you accomplish that. The returns for most relative oil indexes are relatively good although it should be noted that the index itself is not directly invested in the underlying oil futures. An ETF it should be understood only tracks performance.

Most advisors will tell their clients that to achieve diversification in a portfolio an investor should consider all types of assets. Oil as a commodity asset has a higher return than equity securities like stocks and fixed income securities such as treasury and corporate bonds. This higher return is balanced with a higher loss potential. As such, when considering adding a commodity, such as oil futures to the portfolio, having an ETF may be an easier and less costly way of doing so without all of the necessary volatility risk.

Investment Considerations for Oil ETFs

Simply putting an oil ETF into a portfolio based on the return is not the way to approach this as an investment strategy. Adding oil ETFs only make sense if such investing compliments your overall investment strategy. If it does not, you should consider alternative types of investments that lower your risk exposure but also gives you the diversification that you are seeking overall. Otherwise you will include an asset class that will do nothing but increase your risk exposure relative to your investment strategy.

To consider oil ETFs you should review your investment plan. In the plan your objectives and goals should be clearly stated and your assets arranged in a way that make sense and will help you achieve your plan. If you are without an investment plan, this is the first thing you should accomplish before considering purchasing oil ETFs.

blog comments powered by Disqus