Investors who want exposure to this incredibly valuable natural resource may be interested in investing in exchange-traded funds that focus on oil and oil production. We’ve compiled this list, presented in no particular order, of the best oil ETFs for investors. In short, when oil prices rise, USO’s price should rise. When oil prices fall, USO should also fall. This can be appealing for investors who do not want to get into commodity investing directly, but who still want exposure to oil. With $2.6 billion invested in the fund as of February 2022, USO is relatively liquid. Its expense ratio, however, is the highest of the ETFs on this list at 0.83%, equivalent to $8.30 for every $1,000 invested. On top of that, oil has performed poorly over the past three years, leading the fund to lose almost a quarter of its value over that time.
iShares U.S. Oil Equipment & Services ETF
Three-year return (as of 2/17/2022): -12.12%Expense ratio: 0.41%Assets under management (AUM as of 2/17/2022): $147.0 millionInception date: 5/1/2006
The iShares U.S. Oil Equipment & Services ETF (IEZ) offers less direct exposure to the oil market. Instead of directly tracking the price of oil, this fund invests in businesses that provide various oil-drilling equipment and companies that offer services to oil production companies. This gives investors a way to get some exposure to oil, as the fates of these companies are intertwined with the success of oil businesses. However, it can reduce some of the risks posed by unsuccessful oil exploration or volatility in oil prices. One drawback of the fund is that it has just $147.0 million under management, so shares may not be as liquid as investors would like. Also, the expense ratio is a bit high at 0.41%, equivalent to $4.10 for every $1,000 invested.
SPDR S&P Oil & Gas Exploration & Production ETF
Three-year return (as of 2/17/2022): -2.48%Expense ratio: 0.35%Assets under management (AUM as of 2/17/2022): $4.5 billionInception date: 6/19/2006
The SPDR S&P Oil & Gas Exploration & Production ETF (XOP) is a fund that focuses on businesses directly involved with the discovery and extraction of oil. This is another indirect way of investing in oil. Rather than buying oil directly, you purchase shares in companies that profit by extracting and selling oil. Oil production businesses will see higher returns when oil prices are high, meaning the price of oil still plays a role in your investment. However, these companies can produce value in other ways, such as by finding new reserves, which can shield your investments somewhat when oil drops in value. With $3.3 billion under management, this ETF is highly liquid. It also has a low expense ratio of 0.35%, equal to $3.50 for every $1,000 invested. It’s also performed better than funds that are more directly invested in oil as a commodity, losing just 7.64% of its value over the past three years.
Vanguard Energy ETF
Three-year return (as of 2/17/2022): 6.30%Expense ratio: 0.10%Assets under management (AUM as of 2/17/2022): $8.4 billionInception date: 9/23/2004
The Vanguard Energy ETF is not purely focused on oil. Instead, this ETF aims to track a benchmark index composed of businesses across the energy industry. This includes oil companies as well as businesses focused on things such as natural gas and coal. A large portion of the fund’s portfolio is invested in oil- and gas-related companies, including businesses focused on things such as storage and transportation rather than extraction, giving you wider exposure to the oil and gas industry, which may appeal to investors looking for a more diversified portfolio. With $8.4 billion in assets, this fund is the largest on the list. It’s also the least expensive, charging an expense ratio of just 0.10%, equivalent to $1 per $1,000 invested. The fund has also performed better than all the other funds on our list, gaining 6.30% over the past three years.
Fidelity MSCI Energy Index ETF
Three-year return (as of 2/17/2022): 6.08%Expense ratio: 0.56%Assets under management (AUM as of 2/17/2022): $1.2 billionInception date: 10/21/2013
The Fidelity MSCI Energy Index ETF is another diversified option for investors who want oil exposure without going all-in on the commodity. While major oil businesses such as Exxon Mobil and Chevron make up a large portion of the fund’s portfolio, it also includes businesses focused on oil equipment and services, transportation, and storage. The fund has $1.2 billion in assets, so it is liquid enough that investors do not need to worry about struggling to buy or sell shares. However, its expense ratio of 0.56%, equivalent to $5.60 for every $1,000 invested, makes it the second most-expensive fund on the list. However, it is also the second-best performing fund on our list, returning 6.08% over the past three years.
Pros and Cons of Investing in Oil
Pros Explained
Oil consumption is expected to increase in the short term: The U.S. government estimates that oil consumption will rise over the next few years, showing that demand for the commodity is still there.Many oil companies are blue-chip businesses with large dividends: Oil businesses tend to be long-established, stable companies. Investors who value dividends and stability may want to invest in those businesses.
Cons Explained
Renewable energy sources have been gaining market share for decades: Especially in recent years, climate change has become a concern for many people, leading to the rise of renewable energy and electric vehicles. Over time, this will likely reduce the demand for oil.Oil prices can be highly volatile: The price of oil can change quickly and without notice. Investors who can’t weather that volatility may want to avoid oil.Politics can complicate oil investments: While the United States produces a large amount of oil, other nations, including Russia, Saudi Arabia, and Iraq, are also major producers. Political tension between these major producers can lead to interruptions and uncertainty in the oil market, making it difficult to predict the direction of the market.
Historical Performance Trends
As you can see from the funds on this list, the past few years have not been great for oil investments, with the best-performing fund on our list returning below 7%, and three of the five ETFs losing money in the past three years. Overall, oil investments can be volatile, thanks to the volatile price of oil. Investors can see large returns as well as large losses in value when investing in oil and oil-related businesses.
Is an Oil ETF Right for Me?
If you are able to deal with volatility, investing in an oil ETF might be a good idea. Investing in some oil ETFs, such as USO, that aim to track the price of oil directly can be a good way for investors who want to try a more active investment strategy without getting directly into commodity and futures trading. If you’re less willing to handle volatility, or simply prefer to avoid fossil fuels because of their negative impact on the environment, you’ll likely be better off with other investments.
The Bottom Line
Oil ETFs give investors an easy way to invest in oil or businesses involved in the oil industry. With oil demand expected to increase in the near future, these ETFs are a way for investors to profit from increased demand for fuel due to increased travel and production of goods after the pandemic. The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.