Oil ETFs - Easy way to Invest in Oil
A few years ago, a large investment in crude oil and numerous oil products was limited to big financial institutions and large oil companies them selves. But development of Oil ETFs in the United States has opened up the market and made the investment process easier in many ways. This includes investments in oil products accessible to small and large investors.
Whether an investor is looking for short-term gains and upward movement in oil prices, or a hedge against rising prices, ETFs can offer a cheap, efficient, and easy method to gain exposure to prices of commodities. But an investor should study and analyze information on Crude Oil prices, petroleum products, energy requirements, global demand and supply, etc, and of course Oil ETFs, before investing a dollar.
Oil ETFs (Exchange Traded Funds) are in many ways similar to other index based Mutual Funds. The commonest ETF structure is to setup a trust. The trust then buys stocks in the index in almost the same quantum and proportion as an index. The trust then issues DTR's (Depository Trust Receipts), which are the same as shares. The DTR's are generally issued for a small fraction of an index's actual value. The DTR's are then traded on the stock exchange. The price of a DTR moves up or down in step with an index.
Unlike index Mutual Funds, the price of Exchange Traded Funds is set with each trade, instead of an end of the day NAV (Net Asset Value). Exchange Traded Funds (ETFs - including Oil ETFs) are more cashable and liquid than index Mutual Funds. When an investor decides to buy or sell an Exchange Traded Fund (ETF), they can do this easily with another investor / investors through the exchange. This transaction will not have any effect on the securities held in the trust. This greatly improves the tax efficiency of Exchange Traded Funds (ETFs) even if compared to Mutual Funds.
When an investor sells shares of a mutual fund, the mutual fund manager must sell some stocks in the fund to get money to pay the investor. This usually triggers a capital loss or gain for the mutual fund. Investors, who held on to the shares and did not sell, may have to pay some taxes on the gains at year-end, although they did not create any tax liability. So investors can be saddled with unexpected and undesirable taxes.
With Exchange Traded Fund - including Oil ETFs, the investors do not trade with the Trust, but with other investors. The trustee of the ETF does not sell any stocks from the trust to create liquidity in order to pay the investor. As such, there are few year-end tax surprises. There are a few other ETF structures, but all have the same or similar advantages. Like Mutual Funds, ETFs are Beta investments, and they do not have any active management, resulting in inexpensive ETFs, which often charge a bit less than Mutual Funds for the same index.
Exchange Traded Funds have grown quite rapidly since 2000, especially Oil ETFs. For small and large investors who are wary of taking risks with their money and need a safe avenue for investment in Oil, an ETF is the answer. Currently there are numerous indexes and Oil ETFs in the market.