Interactive Investor

Which ETFs are the best way to play the oil rally?

Investors can use ETFs to either track the price of oil or buy energy shares.

9th March 2022 09:35

Kyle Caldwell from interactive investor

Investors can use ETFs to either track the price of oil or buy energy shares. 

The price of oil is soaring, which is bad news for consumers as it translates to both higher petrol prices and energy bills.  

Two years ago, the pandemic and Covid lockdowns caused the price of Brent crude to fall to as low as $11 a barrel. It is now trading at around $130. At one point earlier this week, it reached $139, its highest level for almost 14 years.

There are various factors behind the soaring oil price, with Russia’s invasion of Ukraine sparking talk of an embargo on Russian oil. Given that Russia is the second-biggest exporter of oil in the world, the prospect of a big drop in supply increases demand. In turn, this pushes up the oil price. Since the start of 2022, the price of ‘black gold’ is up over 60%, from around $78.

It was announced yesterday evening (8 March) that the US has banned oil imports, and that the UK will phase them out by the end of this year.

Prior to the Ukraine crisis, crude had been buoyed by economic activity picking up following the end of lockdowns. Two other factors behind the growing demand for commodities included the prospect of a new commodity super-cycle, and rising inflation.

Compounding the price rise was OPEC and other oil producers’ inability to reach an agreement to increase output. As a result, demand rose in the face of constricted supply.

For investors looking for ways to gain exposure to oil, the simplest way is to back an exchange-traded commodity (ETC) tracking the price. Over three months, six months and one year, the WisdomTree Brent Crude Oil ETC (LSE:BRNT) and the WisdomTree WTI Crude Oil ETC (LSE:CRUD) have been the standout performers among oil-exposed passive products. Over one year, the respective returns are 118% and 106.2% in sterling terms, according to Trustnet.

Diversified exposure can be obtained by buying a commodity exchange-traded fund (ETF). Investors who bought the L&G Longer Dated All Commodities ETF (LSE:CMFP) and WisdomTree Enhanced Commodity ETF (LSE: WCOB) would have experienced respective returns of 64.1% and 58% over the past year. The WisdomTree ETF is a member of interactive investor’s Super 60 rated list of investments.

There are other ways for investors to play the oil rally, such as by using an ETF tracking a basket of oil or energy stocks. For example, the Lyxor MSCI World Energy ETF (LSE:NRGW) tracks a basket of global energy stocks and is up 46.4% over the past year.

For exposure to US and European producers, options include the iShares S&P 500 Energy Sect ETF USD Acc (LSE:IUES) and the SPDR® MSCI Europe Energy ETF EUR (LSE:ENGY).

There are also ETFs tracking companies involved in the extraction and sale of oil, such as the Invesco Energy S&P US Select Sector UCITS ETF (LSE:XLES).  

Another way to play oil price rises is to buy an ETF tracking the index of an oil-heavy economy. This approach has been rewarding for investors who backed the Invesco MSCI Saudi Arabia ETF (LSE:MSAU). However, there have been sizeable losses for investors holding the HSBC MSCI Russia Capped ETF (LSE:HRUD).

Exchange-traded commodities (ETCs) are instruments that track the price of a single commodity, or a basket of commodities. They can either be physically backed through holdings in the commodity itself, or they may use ‘swaps’ with other financial institutions to provide the exposure. The word ‘physical’ may appear in the name of ETCs that invest directly. 

Under European regulations, the ETFs cannot hold just one type of commodity, as they are required to provide a minimum level of diversification.

How oil-exposed ETFs have performed

Passive product Three months Six months One year Three years
WisdomTree Brent Crude Oil ETC  71.1 95 118 102.8
WisdomTree WTI Crude Oil ETC 65.5 85.1 106.2 36.3
Invesco Energy S&P US Select Sector UCITS ETF  35.5 72.1 58.8 39.6
L&G Longer Dated All Commodities ETF 31.5 41.7 64.1 77.4
WisdomTree Enhanced Commodity ETF 31.5 40.7 58 68.4
Lyxor World Energy ETF 26.7 52.8 46.4 21.6
iShares Oil & Gas Exploration & Production UCITS ETF 25 63.7 62.7 47.1
SPDR® MSCI Europe Energy ETF 8.2 26 23.5 1.7

Source: Trustnet. Data to close of trading on 8 March 2022. 

 

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