What is Oil ETF and its Benefits

Being an investor, you would like to include oil investments in your portfolio as a part of your trading strategy. However, keeping barrels of oil reserves in your store is one of the most inefficient ways of managing your portfolio and exposes you to the risk of a fire hazard as well. But you can save yourself from this and can invest in alternative oil investments. One such investment is to enter in the Oil ETFs. Oil ETFs or Oil Commodity exchange traded funds provide you an easy way to invest in the oil commodity market and expose your investment to the price fluctuation and performance of oil in the market.

The oil ETF consists of oil stocks and derivatives, such as futures and options in order to track the oil prices and oil related indexes. For example, in case of the United States Oil ETF, you do not actually keep oil reserves. This fund is a pool of derivative contracts, such as forwards, futures and options for different petroleum, oil, and gas-based fuels. Therefore, it only exposes you to the oil prices in the oil commodity market and helps you keep your backyard free from oil reserves.

One of the best things about the oil ETFs is that they can be easily traded. If you want to add oil investments in your portfolio, you need to purchase individual oil company stocks. It is difficult to decide which company’s stock are good for investment and even if you make this decision, you still face a challenge of purchasing all the stocks in the index basket to achieve a certain price. The complications of investing in the oil commodity market and the commissions associated with it, makes it harder for you to achieve your desired portfolio. But if you invest in oil ETF, you get instant exposure to oil prices with a single trade.

When you consider adding oil ETF in your portfolio, you don’t pay capital gains tax until you sell the ETFs, which gives them a huge advantage of saving tax over other investments, such as mutual funds. Oil ETFs are easier to trade and has lower fees as compared to investing individually in the oil stocks of different oil companies in the oil commodity market. Yes, there are certain limitations when you trade oil ETFs but once you understand how they work, it can be a very profitable investment in your portfolio.

You can learn the basics of investing in the oil ETFs by consulting Your Personal Financial Mentor as he can analyze the market trends and can guide you how to make profitable investments in the oil commodity market. You can also use oil ETFs to hedge the exposure of the downside risk of the oil industry and foreign investments. If you have foreign investments in a country where oil is the major commodity that generates revenue and income, then you can sell oil ETFs to protect the downside risk of your portfolio.

Categories: Oil Commodity Market

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September 7, 2013 What is Oil ETF and its Benefits