Introduction to Crude Oil ETF Investment: Complete Guide and Product Selection

Understanding Crude Oil and Investment Channels

As the commodity with the largest global trading volume, crude oil holds a pivotal position in international markets and is one of the key drivers of the global economy. Investors interested in participating in the crude oil market can choose from various channels including futures, funds, ETFs, stocks, and options. Among these, crude oil ETFs are popular due to their ease of operation and relatively manageable risk, making them the top choice for many retail investors.

This article will delve into the operational mechanisms and product features of crude oil ETFs, list specific ETF products available in Taiwan and the US stock market, and introduce other crude oil investment methods to provide a comprehensive understanding of the crude oil investment ecosystem.

What is a Crude Oil ETF? Core Concept Analysis

Crude oil ETFs first appeared in 2005, during a period of strong global economic recovery. Unlike traditional notions, crude oil ETFs do not hold physical crude oil. Instead, they track crude oil futures prices or specific crude oil indices through derivatives such as futures, forward contracts, or swaps, thereby indirectly reflecting the crude oil market trends.

The convenience of this investment approach lies in the fact that trading is conducted entirely through exchanges, with buying and selling methods identical to those of regular stocks, eliminating the need for complex procedures. As the market has developed, innovative products such as inverse ETFs and leveraged ETFs have emerged. Investors can choose 2-3 times long or short strategies, with 2x leveraged products being the most common. The US is the largest market for these derivative ETFs. Inverse ETFs perform opposite to the underlying index, providing investors with more diverse trading options.

Overview and Comparison of Crude Oil ETF Products

Taiwan Market Crude Oil ETF Products

Yuanta S&P Oil ETF (00642U)

• Issuer: Yuanta Investment Trust
• Tracking Target: S&P GSCI Crude Oil Enhanced Excess Return
• Management Fee: 1.00%; Custodian Fee: 0.15%
• Current Price: NT$14.87

As the only financial product in Taiwan directly related to crude oil investment, this ETF tracks the performance of crude oil futures prices. Its underlying index is the S&P Goldman Sachs Crude Oil ER, which has a high correlation of 0.923 with spot crude oil prices, effectively capturing oil price movements.

JKoop Brent Oil 2x (00715L)

• Issuer: JKoop Investment Trust
• Tracking Target: S&P Goldman Sachs Brent Crude Oil Daily Return 2x ER
• Management Fee: 1%; Custodian Fee: 0.15%
• Current Price: NT$11.79

This is Taiwan’s first leveraged ETF tracking the performance of Brent crude oil futures index with a positive 2x leverage. It references Brent crude oil futures contracts traded on the Intercontinental Exchange (ICE) in the UK, providing investors with leveraged investment and hedging tools.

iShares MSCI Taiwan ETF (EWT)

• Issuer: iShares (BlackRock)
• Tracking Target: MSCI Taiwan 25/50 Index
• Total Management Fee: 0.62%
• Current Price: US$46.63

Although not focused solely on crude oil, this ETF tracks the performance of Taiwan’s market-cap weighted index, covering the top 85% of the market, including energy-related industries.

US Stock Market Crude Oil-Related ETFs

Energy Select Sector SPDR Fund (XLE)

• Issuer: State Street Global Advisors
• Tracking Target: Major integrated oil and gas companies worldwide
• Management Fee: 0.13%
• Annual Dividend Yield: 15.57%
• Assets Under Management: US$8.3313 billion
• Current Price: US$34.62

XLE consists entirely of stocks listed in the US, focusing on large energy companies. Major holdings include Chevron, ExxonMobil, and ConocoPhillips, all industry leaders in integrated energy.

iShares Global Energy ETF (IXC)

• Issuer: iShares
• Tracking Target: Large energy stocks worldwide
• Management Fee: 0.46%
• Annual Dividend Yield: 11.88%
• Assets Under Management: US$690.8 million
• Current Price: US$18.41

This fund tracks the performance of large global energy companies, with core holdings in ExxonMobil, Chevron, and Total.

Global MLP and Energy Infrastructure ETF (MLPX)

• Issuer: Global X
• Tracking Target: Oil and natural gas pipeline companies (MLPs)
• Management Fee: 0.45%
• Annual Dividend Yield: 10.1%
• Assets Under Management: US$506 million
• Current Price: US$7.59

MLPX tracks the Solactive MLP and Energy Infrastructure Index, focusing on midstream oil and gas industry companies. Major components include TC Energy, Enbridge, and Williams Companies.

Other Crude Oil Investment Methods in Detail

Crude Oil Futures Trading

Crude oil futures are considered the most direct way to trade commodities besides purchasing spot crude oil, with large trading volumes. Since most investors cannot store or distribute crude oil, futures become the primary choice. Futures offer high liquidity but are also highly volatile, making price prediction difficult.

Main futures contracts include West Texas Intermediate (WTI) and Brent crude oil, along with high-sulfur crude oil futures and Dubai Sour crude futures traded on the Singapore Exchange. However, trading in crude oil futures involves huge amounts and high investment thresholds, making them unsuitable for small and retail investors.

Crude Oil Stock Investment

Investing directly in stocks of crude oil companies is another approach. Investors need to monitor global oil prices and conduct in-depth research on target companies’ production potential, macro energy environment, competitive landscape, and financial health to select stocks accurately.

Major crude oil producers include Sinopec (the world’s largest refining company), ExxonMobil, Royal Dutch Shell (operating over 40,000 gas stations worldwide), BP (a pioneer in Middle Eastern oil development), and Total (France’s energy giant).

Crude Oil Options Trading

Options trading operates similarly to futures but offers more flexibility. It allows investors to choose not to exercise the contract if the futures price moves unfavorably, risking only the premium paid, effectively providing insurance for futures positions.

Example: Suppose the current oil price is US$30/barrel, with an expectation that it will break US$40 in June, and the premium is US$0.1. The cost to buy the option is US$100 (0.1×1000). If the June oil price rises to US$45/barrel, exercising the option yields a profit of US$4,900 (45×1000 - 40,100). Conversely, if the price moves in the opposite direction, losses are limited to the premium paid.

Contract for Difference (CFD) Overview

CFDs are a popular choice among investors. This method allows traders to profit from price movements of crude oil using margin and leverage without owning the physical commodity. For example, a 5% margin means investing US$1,000 requires only US$50. CFDs typically do not charge commissions but profit from the bid-ask spread, and there is no standard lot size—minimum trading can be as low as 10 barrels.

Important Risk Warning: CFDs are leveraged products with significantly increased risks. Investors must set stop-loss and take-profit points and strictly manage risks to avoid substantial losses.

Advantages of Investing in Crude Oil ETFs

Investors include crude oil ETFs in their portfolios mainly for the following reasons:

Strong Trading Convenience

Crude oil ETFs are traded on stock exchanges, with operations similar to stocks, eliminating the need for opening futures accounts, making transactions simple and efficient.

Intra-day Trading Flexibility

Compared to individual stocks, ETFs have higher liquidity, allowing frequent trading within the same day to capture short-term fluctuations, which helps diversify risks associated with single assets.

Significant Tax Benefits

Capital gains tax on crude oil ETFs is deferred until sale, offering greater tax advantages compared to other fund products.

Relatively Low Costs

ETF trading costs are much lower than physical trading, saving on custody, storage, and insurance fees. Management fees are usually around 0.3%-0.4%, saving 2-3% compared to futures and stock investments.

Two-way Trading Mechanism

Investors can flexibly go long or short, managing risks through limit orders and stop-loss settings.

Overall Advantage Assessment

Crude oil ETFs combine some benefits of futures trading while having lower liquidation risks and more accessible investment thresholds. Choosing large, reputable issuers is crucial, as these have better research systems, more sensitive market price capture, and safer capital management.

Risks Elements in Crude Oil ETF Investment

The crude oil industry offers lucrative opportunities but also involves high risks. Investors should be aware of the following risks:

Severe Oil Price Volatility

International political events and environmental policies can significantly and unpredictably impact the crude oil market. For example, in 2020, oil prices turned negative due to the pandemic, illustrating extreme volatility.

More Active Futures Trading

Crude oil futures trading volume far exceeds ETFs, attracting large institutional asset allocations and oil-related companies, which may lead to relatively weaker liquidity in ETFs.

High Experience Requirements for Investors

Inexperienced investors unfamiliar with crude oil contracts face greater risks. Some crude oil ETFs track small and medium-sized US shale gas companies, which are less competitive and may go bankrupt faster in low oil price environments. Careful analysis of tracking data is necessary to avoid blind purchases.

High Cost of Roll-Over

ETFs tracking crude oil futures face high roll-over costs, making them unsuitable for long-term holding and increasing capital consumption. They are more suitable for short- to medium-term trading.

Crude Oil ETF Investment Strategy Guide

Build a Diversified Portfolio

Crude oil ETFs can be bought and sold like stocks, offering various strategic options. To stabilize the crude oil portion of a portfolio, investors can sell crude oil ETFs to reduce downside risk. If holding long positions in multiple oil company stocks, selling oil ETFs can hedge risks.

Use Inverse ETF Strategies

Buying inverse crude oil ETFs that track the inverse performance of crude oil indices is suitable for investors who want to short crude oil but are limited by margin requirements. However, inverse ETFs carry extremely high risks; while they can hedge risks and profit during market downturns, rising oil prices may lead to total loss of principal. Investors must carefully assess their risk tolerance before investing.