If you follow the futures markets, you would have heard about it one time or another. Investing in oil is a great way to diversify your portfolio. But if you’re just starting out, you have to know how you should go about investing in this commodity.
The easiest way to expose yourself to speculate on the price and performance of oil is through the Oil commodity Exchange Traded Funds or the Oil ETFs. The Oil ETFs are made up on oil company futures or stocks and derivatives contracts. This lets you track the price of oil and oil-related indexes.
One thing to note here is that you don’t actually own the oil or an oil rig, you’re just exposing yourself to the price of oil. Oil ETFs are quite simple to trade as you can start investing in specific oil company stocks.
One of the major benefits of adding an oil ETF to your portfolio is the fact that you don’t incur capital gains taxes until the fund is sold. So this gives the ETFs a massive advantage over other investment channels like mutual funds.
Further, these are traded at comparatively lower fees, but you will have to understand how Oil ETFs works.
Investing starts with thorough research, so make sure that you do your homework. You should track the performance of the oil price and see how other major Oil ETFs respond to the market. It will also be a good idea to conduct a fundamental analysis before you make a decision.
If you want to stabilize your oil investments, you can trade one of your Oil ETFs and diminish your exposure to risk. Further, you can utilize this to hedge to downside risk for both foreign investments and the industry.
This means if you have a lot of oil stocks in your investment portfolio, you can sell an oil ETF to hedge your downside risk. Further, if you have invested in a foreign country where oil makes up most of the nation’s GDP, you can sell an oil ETF to protect downside.There is also another option of buying an inverse oil ETF. This will track the price of an oil index or oil in the opposite direction. This is an ideal solution if you want to short oil but can’t sell due to account restrictions or margins.